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April 29, 2012 12:21 PM Dani Rodrik on economic ideology and the meaning of self-interest

By Kathleen Geier

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.
— John Maynard Keynes, The General Theory of Employment, Interest and Money, (1935)

Dani Rodrik, who’s one of the more thoughtful economists out there, has written an interesting piece about the meaning of self-interest. We often write about self-interest as if it were something innate and self-evident, but it’s not so simple. Rodrik writes:

Interests are not fixed or predetermined. They are themselves shaped by ideas - beliefs about who we are, what we are trying to achieve, and how the world works. Our perceptions of self-interest are always filtered through the lens of ideas.

He argues that self-interest can take many different forms:

Consider a struggling firm that is trying to improve its competitive position. One strategy is to lay off some workers and outsource production to cheaper locations in Asia. Alternatively, the firm can invest in skills training and build a more productive workforce with greater loyalty and hence lower turnover costs. It can compete on price or on quality.

The mere fact that the firm’s owners are self-interested tells us little about which of these strategies will be followed. What ultimately determines the firm’s choice is a whole series of subjective evaluations of the likelihood of different scenarios, alongside a calculation of their costs and benefits.

Rodrik puts his finger on one of my major beefs with the economics profession. Most American economists don’t have anything like Rodrik’s nuanced understanding of self-interest. To them, self-interest equals utility maximization, and utility maximization basically means accumulating as much wealth as possible, and the only way to achieve that on a large scale is through low taxes, a radically diminished public sector, and heavily deregulated markets.

But there are other ways to achieve economic growth, particularly if we are interested in doing so over the long term. For example, if we want to have the kind of society where entrepreneurship is encouraged, we would create a health care system that doesn’t tie people’s access to affordable care to their employment. And if we wanted a society that made the most efficient use of everyone’s talents, we’d ensure that everyone who is capable of succeeding in college could could get a higher education for free.

These days, the apostles of the free market argue that in order for the economy to thrive, the government must drastically cut back spending. But in reality, the best way to promote economic growth is through fiscal stimulus by the government. Cutting spending dramatically reduces the kind of growth and innovation that our free market system could otherwise achieve.

It’s long been fashionable among the neoliberal pundit class to deride New Deal policies such as Social Security, strong unions, and labor protections, but the fact is that those programs were created by self-interested elites who wanted to save capitalism. At the time, the capitalist system was in crisis, and it was feared that if concessions were not made to the masses, they would revolt. Achieving the minimal level of economic security that the New Deal provided did much to extinguish revolutionary fervor, and the owners of capital were able to breathe a sigh of relief.

It’s no accident that economic growth soared in the post-World War II era. A much greater public sector and a more highly regulated economy actually helped that economy to grow and become more efficient. But in the intervening decades, elites have forgotten those lessons, and the American economics profession, which has pushed a vision of self-interest and the good society that was grossly distorted, and yet extremely influential, has a lot to answer for here. What Rodrik refers to as “the unbridled liberalization and financial excess” of the past several decades was promoted by the economics profession as a whole, and it has led us to the brink of economic disaster.

Indeed, with its corrupt and dysfunctional government, stagnant economy, soaring income inequality, and significantly diminished social mobility, America is on its way toward becoming a second-rate power. Ironically, a more realistic concept of what is in their best interests might have prevented, and may still yet prevent, our elites from wrecking our economy, and, over the long haul, destroying themselves.

Kathleen Geier is a writer and public policy researcher who lives in Chicago. She blogs at Inequality Matters. Find her on Twitter: @Kathy_Gee

Comments

  • Rick B on April 29, 2012 3:07 PM:

    Good post.

    Yeah, a firm can

    "...lay off some workers and outsource production to cheaper locations in Asia. Alternatively, the firm can invest in skills training and build a more productive workforce with greater loyalty and hence lower turnover costs. It can compete on price or on quality."
    If the top management holds the workers in contempt and considers its best action to be to destroy the union, guess which choice they are going to make?

    At present American Airlines is trying to negotiate pay and benefits down with its unions under threat of going to the bankruptcy judge and having the union contracts thrown out. Anyone who has followed the business news in Fort Worth will know that the AMR top management hold the workers in utter contempt. It's not especially a class thing, either, since one of the big three is the Airline Pilots Union.

    The Union reaction is to encourage the takeover bid by U.S. Airways. AMR just sees itself surrounded by enemies and has no idea that they created their worst enemies by treating them with such contempt, even when they were bargaining away pay and benefits to keep the airline alive. After they did that, the union workers took the cuts and the top managers got massive $multimillion bonuses. That part IS a class thing.

    I blame the conservative mind-set for creating real enemies between management and labor. Reagan was a symbol of that nastiness.

  • Rick B on April 29, 2012 3:11 PM:

    Another thing. Cutting government spending means, among other things, cutting R&D on pure science of the type that creates new future industries.

    The phone company demonstrates that private companies DO NOT INVEST in research that creates new industries. It would damage the return on their sunk costs. The last time the phone company itself became innovative was after it was broken up by a federal judge and before AT&T was allowed to recombine the pieces.

  • FlipYrWhig on April 29, 2012 3:28 PM:

    Loving this piece. I agree wholeheartedly that we tend to take a naive and oversimplistic view of the nature of "self-interest," which is really one of the key concepts of economic, political, and social thought in the Enlightenment tradition.

  • Rick Massimo on April 29, 2012 4:19 PM:

    Whenever a conservative starts blathering about self-interest I know with all the certainty that can be mustered in this world that at some point in the conversation he will 1) demonstrate that he thinks people's real self-interest isn't always what they think it is; 2) demonstrate that HIS self-interest is ALWAYS EXACTLY what he thinks it is; 3) not notice this discrepancy; and 4) when I point out this discrepancy, start talking really fast about something else.

  • exlibra on April 29, 2012 5:21 PM:

    But there are other ways to achieve economic growth, particularly if we are interested in doing so over the long term. -- Kathleen Geier.

    And there, as we used to say in Poland, lies the dog, buried. Thinking long term went out with Queen Victoria. Now, it's all "grab your money and run" mindset.

  • Josef K on April 29, 2012 6:11 PM:

    I'm left to wonder if these idiot 1%ers will even notice anything is amiss when they're being marched to the guillotines?

  • Doug on April 29, 2012 7:00 PM:

    I second exlibra's post.
    Most, if not ALL, companies in this country, faced with a choice between down-sizing and out-sourcing or investing in their employees, will go with the former because it will most likely bring the quickest return on their investments and be the easiest to implement.
    I think part of the reason we've reached this point economically in our country is because it wasn't only Republicans who forgot the economic lessons of the Great Depression.
    WHY do we have SS? WHY was the SEC set up? WHY was Glass-Steagall enacted? WHY were marginal income tax rates set at 70%? These things weren't done simply because they were "good" things, to quote Martha Stewart, in and of themselves. They are that, but these pieces of legislation, and the ones that followed, were enacted to produce a certain set of economic AND social conditions for this country.
    Primarily, the economic conditions were designed to benefit the majority of the population WITHOUT preventing those at the top from ALSO benefiting. In other words, EVERYONE, just not the rich, gets richer. Which, as we've gottenrid of so much New Deal legislation, is exactly the opposite of what is now happening.
    We know that greed is a very powerful emotion and people, as we've seen over the past several decades, will go to almost any length to justify that greed. Prior to the New Deal, those who were rich often justified that wealth by claiming divine sanction; ie, they were rich because God wanted them to be rich and any attempt to change that was, literally, blasphemous. Of course, those same people had no explanation for why God ALSO punished those who WEREN'T rich with things such as the Great Depression...
    The present-day cult of the "job creators" is just an up-dated version of "divine sanction". Anyone with the slightest knowledge of economics can quickly determine that the success of ANY business is NEVER due to the actions of the one person at the top; the failure of a business, on the other hand, often IS. Lord Acton's "Power corrupts and absolute power corrupts absolutely" applies to business even more than politics as there's no electorate standing in the way of, for example, a Carly Fiorino, a Donald Trump or the guys in charge at ENRON.
    We ourselves, as Democrats/Progressives/liberals, have to understand ALL the reason behind the New Deal/Fair Deal/Great Society legislation so that it can communicated to those who provide the means for such legislation: the voters. Too many deride attempts to inform the voting public about "policy" without realizing that, unless the voting public knows WHY something is being done or pushed by a politician, they'll be less likely to support it.
    The idea of a society where EVERYONE is fairly rewarded for their work, where EVERYONE has a chance to improve their lives and the lives of their children is a very powerful one and is, I believe, a major reason for Mr. Obama's election in 2008 - he was just such an example.
    If we don't want Mr. Obama to be the last President of this country NOT from the uber-rich, it's up to us to get the word out about WHY these sort of things matter.
    (sorry about the length)

  • T-Rex on April 29, 2012 7:27 PM:

    The supreme irony is that Ayn Rand was writing her dystopian novels about an economy and infrastructure crumbling under too much regulation during the precise time when it was in fact thriving. In the years since, we've seen Rand's theories put more and more into practice -- and NOW we DO have a crumbling infrastructure and a seriously endangered economy.

  • Texas Aggie on April 30, 2012 12:21 AM:

    Milton Friedman is one of the most influential economists responsible for the "greed is good" mentality that defines self-interest these days. His hypotheses (not "theories" because theories are hypotheses that are backed by evidence) are responsible for much that has gone wrong with the economic system.

    But if you look at his background, you find the reason that his prejudices were bent the way that they were. It seems that his family owned a sweat shop and were constantly battling labor that didn't think that they should be exploited. This concept obviously didn't win much approval around the Friedman dinner table.

  • zandru on April 30, 2012 10:23 AM:

    Thanks, Doug! Well stated.

    Whoa! Captcha sez "BankS As castle" - all too true.

  • Robert Waldmann on April 30, 2012 7:05 PM:

    You have achieved the almost impossible. As an American economist, I am offended by your reckless slander of American economists. If you are interested, google me. You will learn just how hard it is to get me to say anything good about the economics profession. What evidence supports your claims in the paragraph which begind "Most American economists" ? what is a more exact fraction ? do you claim that you have described the views of 55% of Amerivan economists or of 80% or what ? how do you define the set of American economists (the standard definition is members of the AEA more of whom self identify as Democrats than as Republicans.

    I stress that for your claim to be accurate an economist must have each and every one of the beliefs you list to belong to the group which you assert is (at least) an absolute majority.

    The list is utterly confused. There is no link between the idiotic ideas that our interest is just to accumulate wealth and the additional idiotic idea that the way a country becomes wealthy is to have low taxes and little regulation.

    On the second point, I agree with you and with a majority of US economists. we tried that and it didn't work ( in the 30s) then we tried massive public intervention and it worked. then we went part of the way back to the old approach and the best thing that can be said is we didn't get all the way back to depression.

    But I ask sincerely for information. Where did you get your beliefs about what most American economists think ? How did you research the question ? Did you research the question ?

  • Robert Waldmann on April 30, 2012 7:06 PM:

    You have achieved the almost impossible. As an American economist, I am offended by your reckless slander of American economists. If you are interested, google me. You will learn just how hard it is to get me to say anything good about the economics profession. What evidence supports your claims in the paragraph which begind "Most American economists" f? what is a more exact fraction ? do you claim that you have described the views of 55% of Amerivan economists or of 80% or what ? how do you define the set of American economists (the standard definition is members of the AEA more of whom self identify as Democrats than as Republicans.

    I stress that for your claim to be accurate an economist must have each and every one of the beliefs you list to belong to the group which you assert is (at least) an absolute majority.

    The list is utterly confused. There is no link between the idiotic ideas that our interest is just to accumulate wealth and the additional idiotic idea that the way a country becomes wealthy is to have low taxes and little regulation.

    On the second point, I agree with you and with a majority of US economists. we tried that and it didn't work ( in the 30s) then we tried massive public intervention and it worked. then we went part of the way back to the old approach and the best thing that can be said is we didn't get all the way back to depression.

    But I ask sincerely for information. Where did you get your beliefs about what most American economists think ? How did you research the question ? Did you research the question ?