Let’s boldly go

This was first published as my Polemic column in the April edition of Fund Strategy.

It may seem a stretch but the death of Leonard Nimoy, who played Mr Spock in Star Trek, reminded me of a key debate in economics. Even those who are not science fiction fans should bear with the argument as it has far-reaching implications.

Spock has become an iconic figure in popular culture. Even those who have never watched the original 1960s TV series often have an image of him as the ultra-logical alien aboard the USS Enterprise.

This is where the economic debate comes in. Critics of free market economics often cite him as the epitome of “rational economic man” or Homo Economicus. The implication is conventional economics makes the erroneous assumption that people always behave rationally.

Diane Coyle, one of Britain’s most accomplished economic writers, is among those who has used Spock to make this point. Back in 1997 she argued in the Independent that a flawed assumption of mainstream economics is that people are fully rational: “They assemble all the available information, they consider the possibilities and they make the choice that maximises their own gain. Mr Spock, the Vulcan first lieutenant in Star Trek (traditional Vulcan greeting: live long and prosper), is the ideal economic agent. The profession assumes that we all think like Vulcans.”

Although I am generally a fan of Coyle’s writing she is way off the mark here. Spock is actually half Vulcan and half human. This is more than just a nerdy point. A recurring theme in the original Star Trek TV series was the conflict between Spock’s rational Vulcan side and his emotional human side. The character did frequently assert the power of logic but often he found himself inwardly torn.

In fact the “real” Spock, that is the character as he actually appeared in the TV series, resembles an economic agent more closely than the caricature. Those economists who focus on humans as rational agents do so as part of a model rather than a literal representation of reality. Their working assumption is people generally behave rationally most of the time. No serious commentator would claim everyone always acts perfectly rationally.

But the problem goes deeper than a caricature of the notion of rational economic man. The critics generally present themselves as radical opponents of free market economics. However, the thrust of their argument is deeply conservative: downplaying or even rejecting human reason.

Proponents of behavioural finance and neuronomics (the application of neuroscience to economics) typically take a dim view of rationality. They accept reason may play some role but generally argue decision-making tends to be warped by substantial cognitive biases. Since I have talked before about the limits of behavioural approaches let’s look at an older form of the argument.

Karl Polanyi, a Hungarian-American economist, attacked the idea of humans as rational economic agents in his work The Great Transformation. He was essentially a moderate socialist who associated rationality with the kind of abstract free market economics common in the Vienna of his youth. In his view, free market economics made the fatal error of seeing markets as natural entities rather than as products of human intervention.

But on closer inspection Polanyi is not just attacking a particular brand of economics but the core idea of human reason. For the thinkers of the Enlightenment – the intellectual and cultural movement that swept Europe and America in the 18th century – the power of reason was a defining quality of human beings. It was by harnessing this power that humans could achieve a freer and more prosperous world.

Polanyi’s work is therefore not so much an attack on the free market but a rejection of Enlightenment thought. His eschewal of this central principle tends to lead to much more downbeat views on the capacity of humans to achieve greater prosperity. It also suggests our ability to understand how the world works is constrained.

Such pessimism was understandable in the midst of the Second World War when Polayni wrote his book. This is particularly true of someone who spent his early life in Vienna.

However, Polanyi has influenced later generations of thinkers who are, if anything, gloomier than him. For example, Joseph Stiglitz, one of the world’s most prominent economic thinkers, wrote the foreword to a new edition of The Great Transformation.

If anything, the advocates of behavioral finance and neuronomics take a darker view still. For instance, Dan Ariely, one of the superstar pundits of the behavioural approach, twists a famous quote from Shakespeare’s Hamlet to make a point about the limitations of human capabilities: “We are not noble in reason, not infinite in faculty, and rather weak in apprehension.”

Unfortunately we live in a world in which such cultural pessimism has taken hold in economics and other disciplines. It would be a great step forward if we could boldly go forward towards a world in which people thought more like Spock.