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This chapter is from the book

Here We Go Round the Prickly Pear

Those of us who have been raised and educated in liberal political economies have been trained to believe that it is human nature to make formally rational choices and transact with each other on an impersonal basis in political and financial markets. Price sensitivity rather than adaptation guides our choices, and technical efficiency is our primary goal. The costs of transacting are irrelevant. Providing that governments or bandits do not interfere too much, we believe that if we follow these principles, we will achieve socially beneficial equilibrium in any situation. These beliefs allow us to tell a sensible story about complicated questions—and sensible stories help us make difficult choices. (Some of my colleagues like to refer to this compunction as "faith-based" political economy.) Alas. Although these simplifications may work well in some situations, they are failing to provide reliable predications about global security issues: Energy security is just one example. Instead of making sense, we are making nonsense, weak predictions, and poor policies.

Our understanding of how we make choices and change turns out to be as important as the substance of these choices. Vernon Smith, a Nobel Prize-winning pioneer in experimental economics, argues that prevailing assumptions and models are grossly misguided. Since the mid-twentieth century, experimental and behavioral economists have been using laboratory experiments to test the predictions of standard models of human behavior. Although their results tend to confirm the predictions of these models in many (but not all) impersonal exchange situations, such as electronic auctions, they are mixed in predicting outcomes in personal exchange. But many of our most important interactions in the global political economy (and elsewhere for that matter) involve personal exchange. These results suggest that we are systematically misunderstanding a great deal of human interaction.

We simply do not behave the way we think we behave. And we most certainly do not behave the way we think we ought to behave. For example, standard models cannot account for the following behaviors that we routinely observe in both the field and in the laboratory:

  • Choosing a cooperative solution even if there is a risk that the person on the other side of the bargain may take advantage.
  • Cooperating with strangers, and with machines.
  • Failing to cooperate or punishing the person on the other side of a bargain when it hurts us to do so.
  • Exerting effort or making a contribution without any prospect for monetary reward.
  • Achieving worse outcomes when we have complete and common information.
  • Forming different expectations and knowledge, even when we have common information and training.

Similarly, standard models—the ones we continue to use and to teach in school, despite their predictive frailties—cannot explain the dilemma Tom Schelling examines, in which intensely competitive and ideologically opposed countries have had weapons of mass destruction for over 60 years but have yet to unleash them. And they cannot explain why some groups are able to protect their natural resources, avert resource conflicts, and avoid the "tragedy of the commons."14 Nor can they explain why Cuban soldiers protected Chevron's oil operations during the Angolan civil war; why, despite religious convictions to the contrary, some young men and women kill themselves in order to kill others for religious reasons; why on 9/11, an able-bodied man working in one of the twin towers decided to stay with his handicapped co-worker, even though there was no reason to believe that they would survive; or, why many economists—perhaps most—refused to travel after 9/11.

Not only do we not behave the way we think we behave or ought to behave, we apparently do not think the way we think we think. Eliot chides that we are "hollow men ... stuffed men leaning together headpieces filled with straw." But we are far better equipped to understand ourselves and the intentions of others than we were in Eliot's day. Our existing models of human nature, government, and the relationship between them rest on rather thin empirical foundations. This is due in part because until fairly recently, we have had limited tools to investigate human nature. But with advances in the neurosciences and analytical technologies, it may be possible to discover the biological basis of human nature, thinking, and choice.

Wrestling with decades of contradictory research results, it occurred to Vernon Smith and his colleague Kevin McCabe that developments in the neurosciences could be fruitfully applied to developing a better understanding of economic behavior. And so in the late 1990s, with the aid of a creative extension to a research grant from the National Science Foundation, they launched a new program of experimental research that McCabe dubbed "neuroeconomics." Today, this effort has morphed into a challenging interdisciplinary research program that uses experimental and brain-imagining techniques to examine decision making with the aim of building a biological model of economic choice.15

As Smith and McCabe were rethinking their approach to investigating behavior, Douglass North was wrestling with a new theoretical approach to understanding growth and change. Steeped in years of research on how people in the western political economies have organized exchange, North concluded that adaptive change requires that our minds evolve.16 Our ability to form beliefs, develop solutions, and choose among them begins in our minds, which, regardless of how one approaches philosophy of mind, requires at least a nodding acquaintance with the brain. It is human minds working together (or not) that create and enforce the rules that govern exchange, choose among these rules, organize production and exchange, adapt to changing conditions, and suffer or enjoy the consequences.

However, changing our minds and our choices may require changing our brains. Many neuroscientists argue that we cannot change our mental state without changing our brain state. But before we can change our brains, we must first understand them and how they are involved in thinking and choice. Then we must apply this knowledge to developing a better understanding of our own intentions, the intentions of others, and how we govern ourselves and our transactions. Finally, we must translate this knowledge into policy making.

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