Economic Activity in Context

A Subset of Human Interdependence

Many economists try to expand economic analysis into other realms. Economics of crime, economics of the family. Nobel Laureate Gary Becker was a prominent figure in this economic imperialism. The idea is that economic theory provides concepts, such as opportunity cost, scarcity, choice, and incentives, that can be used even when your intuition does not perceive a market.

Instead, I think of economics as a subset of the larger topic of human interdependence. Economic activity takes place within a system of psychological propensities, group norms, beliefs, social conventions, hierarchies of prestige and dominance, and formal institutions. I am mostly interested in how psychology, sociology, and anthropology can inform economics, rather than the other way around. That is why I read broadly in those areas, rather than economics journals.

Economic activity itself I define as specialization and trade. Other economists are happy to speak of a “Robinson Crusoe economy,” in which a resident of a desert island tries to allocate his efforts. I reject that as a heuristic.

Specialization and trade, or outsourcing by choice, is one of the set of behaviors that is unique to humans. Start with two creatures, not mates, each of whom is capable of fishing or gathering berries. If one of them specializes in fishing and the other one gathers berries, and they trade with one another, then I bet that the creatures are humans. I can think of no examples of other species in which two creatures who are not mates will choose to specialize and trade.

Even more striking is that outsourcing has become increasingly roundabout and complex. Famously, the process of making something as simple as a pencil is roundabout almost beyond comprehension. So even if you could come up with a convincing example of a non-human species that specializes by choice (rather than by biological programming), your outsourcing species did not continuously evolve new modes of specialization and more complex and roundabout trading networks.

There is an anthropological book waiting to be written about how human outsourcing evolved. In the hunter-gatherer era, was “specialization” just a matter of sex roles? Was “trade” activated only involving humans (brides bought or sold), or when one tribe enslaved another, and captors exchanged with one another some of their captives? Where does the role of shaman fit in relative to specialization?

When agriculture emerged, specialists in weaponry and warfare had advantages. Did they direct the specialization of everyone else? When the major religions emerged, how did their doctrines and bureaucracies affect economic activity?

To be successful, in a Darwinian sense, humans have to compete in three levels of games. At the individual level, we have to find mates, reproduce, and provide for our offspring. At a sub-Dunbar group level (meaning under roughly 150 persons), we have to obtain emotional and material support from the groups to which we belong, and our group has to avoid being outcompeted by other groups. At a larger corporate and society level (I call this super-Dunbar, in which there is considerable interdependence in a society of more than about 150 people), the performance of rulers and institutions has to be conducive to order and prosperity.

The incentives in these games are often in tension. Maybe I can gain a mate at the expense of someone else in my (sub-Dunbar) group, but this could lead to dissension and cause the group to become dysfunctional. Maybe my group can take advantage of rent-seeking opportunities that the society permits, but only at the cost of breaking down social trust and undermining the order and prosperity that the society provides.

These games evolve to be very complex. Groups develop norms and enforcement mechanisms that serve to reward pro-social behavior and discourage individual cheating. Larger social institutions develop formal rules and hierarchies that are capable of channeling group behavior toward overall societal goals and capable of breaking down group loyalty when it threatens the rest of society.

The group may become too authoritarian toward the individual. The society’s rulers may become too authoritarian toward the group. (In what North, Weingast, and Wallis call the “natural state” or “limited-access order,” only members of the ruling coalition can form organizations.) When it comes to human interdependence, Sowell’s Law applies: there are no solutions, only trade-offs.

Markets are useful at the society level, above the Dunbar number. Below the Dunbar number, a group’s economic roles can be assigned by a leader or negotiated informally. Above the Dunbar number, some formal mechanism is required. There might be a caste system or a feudal hierarchy, or a corporate organization chart. But markets often provide the most efficient and egalitarian way to assign roles and allocate resources.

For most of our evolutionary history we lived in groups below the Dunbar number, so there is no reason for us to have inherited an intuitive appreciation of markets. I believe that it is incumbent upon economists to try to help people to understand the way that markets provide order in society.

My impression is that hostility toward markets has been on the rise in recent years. We may speculate why this might be so, and why modern economists are not as enthused about markets as their classical predecessors.

In the 1950s and early 1960s when I grew up, so did modern economics. In the United States, order was something you could take for granted. Until the latter part of 1960s, the order was relatively unquestioned.

Maybe that is why there was a baby boom that I was a part of. Maybe that is why economics became so obsessed with the calculus of optimization problems. To think of economic activity in terms of optimization problems is quite a luxury. Most societies, throughout most of history, struggled simply to have some form of economic order.

It strikes me as escapist for economists to turn away from the issue of order and decide to focus on solving abstract optimization problems. Instead of taking order for granted and trying to model the optimum, I would rather try to understand what behaviors threaten order and what behaviors and institutions are protective of order.