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The hedonistic assumption in economics

August 10, 2010

The economics profession is a powerful institutional force for the status quo and its orthodox views must therefore be confronted if our goal is radical progressive change.  One of the profession’s key orthodoxies is the hedonistic view of human motivation in which an individual’s sole goal is seen as pecuniary gain.  This, of course, fits very well within the logic of capitalism but there’s volumes of psychological and organizational research which clearly demonstrate money is not a prime motivator.  We are motivated to a far greater degree by things like security, camaraderie, pride in good work, recognition, and status.

Paul Krugman demonstrates today that orthodox hedonism is well entrenched within center-left economics.  He attempts, through calculus no less, to determine how hard an individual will work given the economic theory that effort is solely dependent on after tax income.

“So I thought it might be worth thinking about this question in terms of a simple model of labor supply. Think of an individual facing a marginal tax rate t; and think of the amount this individual produces as depending on effort, which in turn depends on how much of his or her income the individual gets to keep at the margin, i.e., 1-t. Then a little calculus will show that whether a tax hike increase raises or lowers revenue depends on whether the elasticity of effort with respect to earnings — the percentage change in effort from a 1 percent rise in 1-t, the after-tax return to effort — is less or more than (1-t)/t.”

Keynes had a good comment relating to this: “Too large a proportion of recent ‘mathematical’ economics are mere concoctions, as imprecise as the initial assumptions they rest on, which allows the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.”

From → Dynamics, Suppression

  1. So true. I don’t know a lot about economics, but I work with real entrepreneurs on a regular basis. There are many reasons people work hard in addition to money. I talked to one guy who was able to make astonishing gains in productivity at his company by combining both pecuniary and other rewards.

    The way he did it: Pay people based on their work output instead of per time worked. Some people are better at their jobs than others. His only explanation of why this was, was that these people liked their jobs more and were more passionate about them.

    When he instituted his plan, a number of employees immediately quit. The quitters tended to be worse at there jobs than the stayers. The stayers were financially incentiveized to invent solutions to making systems faster and they became very passionate about their work. Productivity soared massively.

    People who didn’t care about money had to be incentivized in other ways. For example, he bought one guy tickets to Disneyland who had not the means to go there and they all went to Disneyland instead of work one day.

    The problem with macroeconomics is that it tries to establish an objective reality through equations. People often don’t live inside of textbooks.

  2. I should add that the stayers may have been genetically more gifted than the quitters at their tasks, which included counting and sorting. If I went to one of my entrepreneur meeting and presented Krugmans ideas, I would be laughed at, because of how little bearing it has on reality.

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