There have been a number of headlines of late proclaiming that the world has changed, and economists have not noticed1,2,3,4,5. The truth is rather the opposite – the world is still the same; economics changed and the world either didn’t notice or acquiesced. Now economics needs to change back! The discipline as it generally understood is more of a lack of discipline – not fit for purpose and internally inconsistent, as a simple example will show.
Let us suppose your car needs a bit of a service – there are two mechanics you can choose between: Sam and Jo.
Sam drives the staff at the garage mercilessly (and also drives a top-of-the-line sports car). Sam lies awake at night planning how to bankrupt the competition, so as to take their customers. No one can say Sam isn’t honest (without being sued) because Sam is well known for staying just on the ‘right’ side of legality; which is to say that Sam has carefully worked out the ‘profit maximising level’ of dishonesty which can be applied in the business world. Sam has also worked out the ‘profit maximising level’ of breakdowns the customers should suffer after having had a service and the ‘profit maximising level’ of price. Sam takes great pride in the drive for riches because, as Sam has often said, ‘It is greed makes the world go round’6.
Jo, on the other hand, takes a different tack. It is obvious to everyone that Jo is never going to be rich, Jo believes in a work/life balance and spends time with the spouse and kids. So far as Jo is concerned, work isn’t everything, but Jo loves cars. Jo travels all over the country to go to car shows and everyone knows, at Jo’s, the staff aim to keep your car going at its best. Jo doesn’t even understand the ‘profit maximising level’ of breakdowns – Jo doesn’t want your car to break down at all. While the primary goal of the business is to, at the least, break even, Jo takes pride in providing good service, not because Jo wants to see you again (for your next service) but because Jo gets a lot of satisfaction out of providing good value for money.
To which mechanic would you take your car? To which mechanic would an economist take a car?
According to the principles of neo-liberal economics, as it is commonly conceived, the answer is clear. As Milton Friedman has pointed out, ‘the social responsibility of business is to increase its profits’ and ‘It is the responsibility of the rest of us to establish a framework of law such that an individual in pursuing his own interest is, to quote Adam Smith .., “led by an invisible hand to promote an end which was no part of his intention …” ’ (i.e. the common good) . This would suggest I go with Sam and, indeed, that the world would be a better place if everyone was like Sam.
However, Sam is going to cost me extra resources. I can not trust Sam when I know there is no concern for my car or my safety, therefore I have to check the job has been done; I have to monitor ‘compliance’. With Sam, I have to pay twice: once to maximize Sam’s profit and again to check the work has been done. The level of service I get from maximising Sam’s profit depends on how much Sam thinks I will spend in monitoring. In effect, I have to force Sam to obey the ‘invisible hand’, and it is going to cost me.
Classical economists are more holistic: Marshall, for example, holds, ‘the best energies of the ablest inventors and organizers … are stimulated by a noble emulation more than by any love of wealth for its own sake’. Likewise, Schumpeter maintained economic actors could be motivated ‘to succeed for the sake, not of the fruits of success, but of success itself … and, finally, the joy of creating, of getting things done, or simply of exercising one’s energy and ingenuity’. While they are talking of entrepreneurs, it must equally be true of business people in general; this explains Jo’s motivation.
Now, it stands to reason, those who pursue other motives than money may be just as selfish as those who are motivated solely by money. Perhaps, Jo wants to give me great value for money and high quality service for purely selfish reasons, such as ‘the joy of … getting things done’. Jo’s joy, what economists would call an intrinsic motivation, creates a win-win. With the money I do not have to spend on monitoring compliance, I can even afford to pay Jo more than I would Sam. I get better service, Jo gets the satisfaction of a job well done and a higher rate of pay.
While no one would suggest we ignore the monetary motivation entirely – Jo will not want to be exploited – it is clear a solely monetary focus creates economic inefficiency; resources are wasted in checking compliance. Sam’s motivation erodes trust and, as Knack and Keefer have shown, countries and cultures with less trust have lower rates of growth. We might suggest, therefore, it would be foolish if I sat Jo down and tried to argue it would be better if Jo’s garage abandoned the desire to give me good service but sought rather to extract the maximum amount of profit in cash. Yet this is precisely the core of teaching in the neo-liberal economic model.
In 1993, R.F. Frank and his colleagues demonstrated that exposure to the self-interest model used in neo-liberal economics causes students to become more self-interested and focused solely on money. More recently, Stout and Ariely amongst many others, have shown an emphasis on monetary rewards tends to: drive out intrinsic rewards; erode conscience; promote a shallow and self-serving response; and increase the costs of monitoring and enforcement. This benefits no-one, not even the cash-greedy; as Kasser and Ahuvia have shown, simple material acquisition, paradoxically, will undermine happiness. Promoting neo-liberal economics runs the risk of taking away the joy of getting things done, leaving both Jo and me worse off. On the other hand, if we promote a more holistic view of economics, perhaps Sam might job satisfaction. If so, I can afford to pay him more and we will all be better off!
One aspect of economics with which we might all agree is that we should operate in the most efficient way possible – therefore we should ditch the modern inefficient neo-liberal approach, as it is commonly conceived, and take a classical holistic view of humanity. It follows that neo-liberalism is not a viable economic paradigm, it is simply an ideology; it may be justified by its adherents, but not by economics.
 Friedman, M. (1970) ‘The Social Responsibility of Business is to Increase its Profits’, The New York Times Magazine, 13 September 1970
 Friedman, M. (1962) Capitalism and Freedom, Chicago: University of Chicago Press
 Marshall, A. (1890) Principles of Economics (8th ed. reprinted 1966) London: MacMillan
 Schumpeter, J.A. (1934) The Theory of Economic Development, trans.R. Opie (1961 ed.), Oxford, Oxford University Press
 Knack, S. and Keefer, P. (1997) Does Social Capital Have an Economic Payoff? A cross-country investigation, Quarterly Journal of Economics,112(4), 1252-88
 Frank, R.H., Gilovich, T. and Regan, D.T. (1993) Does studying Economics Inhibit Cooperation?, The Journal of Economic Perspectives, 7(2), 159-171
 Stout, L. (2012) Killing Conscience: The Unintended Behavioral Consequences of ‘Pay For Performance’. Available at http://www.law.leeds.ac.uk/assets/files/research/cblp/conf-jan13/killing-conscience.pdf
 Ariely, D. (2008) Predictably Irrational: The hidden forces that shape our decisions, London: Harper Collins
 Kasser, T. and Ahuvia, A.C. (2002) Materialistic Values and Well-being in Business Students, European Journal of Social Psychology, 32, 137-146
Please note that blog posts do not necessarily represent the views of other authors on the blog or of the Manchester Metropolitan University