Roberts: The use of greed in economics

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Gavin RobertsSome people mistakenly believe that economics teaches “greed is good.” Greed is a selfish and excessive desire for more, whether that be money, junk food or adoration. When we think and talk about greed, as the (in)famous economist Milton Friedman once pointed out, we almost always attribute it to others because greed bothers our moral sentiments.
Economists use simplified models to understand the complex world of human behavior and interactions, like how a map provides a useful simplification of a landscape. Maps and economic models are useful when they’re simple enough to use and make accurate predictions related to their user’s goals. Economic models, and the assumptions they’re built on, are often criticized for being unrealistic. But a model’s usefulness with respect to its user’s goals is often unrelated to its realism. The assumption that the earth is flat implicit to many maps is criticized less because more people have beneficial experience with these unrealistic models. An oft criticized assumption of economics models is that human beings are rational. To paraphrase, assuming rationality means that economics models are usually built on the assumption that individuals are trying to maximize their own well-being as judged by themselves.
Many people interpret the assumption of rationality as an assumption of greed. That’s OK. It indicates that many people believe that others selfishly and excessively desire something. There are strong reasons to believe that evolution generated these desires as a characteristic of human nature given the extreme scarcity humans have faced for most of their existence — i.e., those humans who selfishly and excessively desired food and shelter were more likely to survive and procreate. But I digress, because as I already mentioned, the realism of the underlying assumptions does not dictate the usefulness of a model.
So, how did economists arrive at, and stick to, the assumption of rationality in many economic models? Economists arrived at this assumption based on observation of human behavior in markets, for “it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard for their own interest,” as Adam Smith once noted. Economists have tended to stick to the assumption of rationality as models based on it have been useful in terms of accurate predictions with respect to the questions economists tend to study.
Consider the example of ships that transported convicts from Great Britain to Australia in the 19th century, which I borrow from a textbook written by economists Tyler Cowen and Alex Tabarrok. At first, the captains of transport ships were paid based on the number of prisoners who boarded the ship in Great Britain. Many prisoners died on the journey. Later, captains were paid for the number of prisoners who arrived in Australia alive. After this change, many more convicts survived the journey. Before this change in rules, newspapers and politicians regularly lambasted captains for the horrible treatment of prisoners, but the captains’ behavior did not change significantly until the change in payment structure.
Let’s consider this rule change related to shipping convicts to Australia under various assumptions. First, assume that captains selfishly and excessively desire money. This desire will lead them to undernourish convicts when they’re paid before the journey, while this desire will lead them to keep convicts alive when they’re paid per convict upon arrival to Australia. Second, let’s assume that captains do not selfishly and excessively desire money. This assumption cannot lead to any prediction with respect to either the change of rules or with respect to the disapprobation of the public in relation to the behavior of ship captains. It’s a useless assumption. Finally, we could assume that captains don’t care about money but primarily desire the adoration of the public. This assumption would lead to the incorrect prediction that criticism by politicians and media will change the behavior of captains. The first assumption leads to the most accurate prediction. The first assumption may or may not reflect reality, but it led to better outcomes for human beings.
Does this anecdote imply that “greed is good”? No, but it means assuming humans are greedy, when that assumption is useful, can lead human institutions to evolve for the better. On our journey from impoverished tribalism to a more interconnected, wealthier, healthier and more just world, we should keep that in mind.
Gavin Roberts is an associate professor of economics and chair of the economics department at Weber State University. He is a recipient of the Gordon Tullock Prize from the Public Choice Society and regularly shares his research locally, nationally and internationally. This commentary is provided through a partnership with Weber State. The views expressed by the author do not necessarily represent the institutional values or positions of the university.