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In the last few years, America and particularly Europe witnessed the worst financial and economic crisis of their time. Taking the extent and severity of the crisis in to consideration, conservative politicians and social scientists alike strongly blamed the heavy and long hands of the government as the primary source of the crisis, despite sarcastically appealing to the same government for bailouts.

On the ideological front, those conservative politicians and social scientists vehemently recommending Ayn Rand – objectivism – as a viable alternative of economic principle American and European governments should follow to resuscitate from the current financial and economic crisis.

Taking stock of the above, a British economist, Judith Marquand, in her recent study on the prevailing economic upheaval in Europe and America stated her observation on some young students of Political Geography at a dinner at Oxford College.  Judith Marquand stated that when the students first come to the College, they all believe that human behavior is simply that of individualistic profit-maximisers. She contemplated that if this is the belief of young geography students, what hope is there that young economists will think otherwise?

Neo-liberal ideology has entered the received wisdom of much of the developed world to an extent which must surely exceed the wildest hopes of Friedrich Hayek, or Milton Friedman, or Margaret Thatcher. This ideology is based on amnesia about three simple propositions.

The first important thing which many economists have forgotten is that human beings, even in their economic behavior, are social animals, collaborative as well as competitive. Secondly, they have forgotten that intended actions have unintended consequences. Thirdly, they have forgotten that markets operate only according to the rules that people set for them. And the popular version of this amnesia leads to the simplistic mental model of those political geography students. Each of these propositions, taken alone, are almost banal. Their consequences are far-reaching.

People now know enough about human nature to know why and how the concept of individualistic, self-seeking ‘economic man’ is grossly inadequate. Unlike Ayn Rand, behavioral economists have shown that people are not always ‘rational’ in the sense used by economists, and indeed that they usually cannot know what their ‘rational choice’ might be. Neuro-scientists, Anthropologists and Social Psychologists have learnt a great deal about the determinants of human behavior in different institutional settings.

The broad outline of their results is unequivocal and has far-reaching implications for the ways in which society is organized. People, as social animals, take note of what they are told by people whom they trust. They often collaborate rather than compete, and are influenced as much by social approval and by habitual relationships as by any apparent price incentive. Their behavior is strongly influenced by the nature of the institutions of the society in which they live.

The implications are far wider than just the suggestion that policy-makers should ‘nudge’ the public to behave in suitable ways. One of their results is to show that people are not only happier, but also work better, in more constructive ways, if they feel that their views are fully taken into account. It follows that co-operative, collaborative ways of organizing work are likely to be more constructive, more productive and indeed more innovative than authoritarian top-down systems. It also follows that people, as citizens, prefer to have their views properly discussed. Where there is insufficient consultation, protest is the natural response.

A further implication of the deep-seated need for people to communicate with one another brings us nearer to the traditional areas of economics. Over the past couple of centuries, the people of the world have seen the ‘co-modification’ of one area of activity after another. The benefits of smoothly functioning markets really do arise when simple commodities, standard goods, are exchanged in a market transaction. But the co-modification of more unusual goods, things that people buy only a few times in their lives and about which they therefore do not know much, and still more, the co-modification of services, things that people do for one another, is quite a different matter.

People prefer to make such transactions in discussions with other people they can trust, who have better knowledge than they do of the product or service in question, indeed who have a degree of professionalism. Let’s think of commodity brokers, or doctors or teachers or lawyers or even car dealers. The purchaser’s knowledge of the properties of the good or service is always imperfect, and the seller’s knowledge is much better, even though there are inevitable gaps and uncertainties. So it is unhelpful to try to de-personalize transactions where professionalism and a relationship of trust are crucial to the customer’s or the citizen’s satisfaction.

The last point is there are important consequences for policies to promote innovation. Small groups who bounce their ideas off each other produce more innovation than the solitary inventor in their laboratory. Innovative performance depends in large part on the culture the innovators operate in.

One crucial issue worth mentioning is the issue of the challenge of governance. Economic policies, like management policies, must always take account of all the foreseeable significant effects. A banal way of expressing this is as the need for ‘joined-up thinking’. Another way is to say that firms, and governments, and economic actors of all kinds, should take account of all their ‘stakeholders’ when they take their decisions. Only a body which has authority to influence the behavior of the economic actors can make sure that these spillover effects are taken fully into account. The frame for the decisions may be delineated by local bye-laws, or national or international legislation, or simply the influence of a strong shared culture. An overwhelmingly important frame, which has been taken for granted for far too long, is of course the world environment.

The world faces unprecedented shortages and threats. The most pressing, of course, is climate change. But there are other, equally sinister, threats. A growing population, 7 billion now and an estimated 9 billion by 2050, places an intolerable strain on scarce water and land resources. There is simply not enough land in the world which can be used for growing crops, nor water to irrigate them. Industrial production uses land and water too. Climate change leads to growing volatility of weather. There are already more floods, more tornados and more droughts than before. These strains, plus the general heating effect of climate change, provide a threat to biodiversity which, if unchecked, is likely to lead to an extinction of species greater than any since the end of the dinosaurs.

Despite the desperate rate at which carbon is being pumped in to the atmosphere, the growing water shortages, the shortage of arable land amid increasing desertification, the decline of fisheries and the burgeoning populations, there may still be time just to avert the worst disasters. The economist Lester Brown in one of his many studies on the subject, estimates the cost of a programme to arrest the deterioration of the soil, to restore fisheries and to protect biodiversity and to achieve basic social goals which would allow people in the poorest countries to adopt improved ways of life at little more than one quarter of the US military budget.

The way out of the world’s problems cannot be to go back to some Golden Age before the Industrial Revolution. The technologies of those days would simply not allow a population as large as the world has today to be fed, and housed, and kept healthy. People have to depend on modern technologies, but they have to be carefully selective in the technologies which they promote.

The difficulties in dealing with these problems are primarily political and economic. Are countries prepared to put suitable incentive structures in place, to make people want to behave in environmentally sensible ways? Are they prepared to tackle the horrendous problems of corruption in developing countries and rich countries alike?

Are governments prepared to pay for, or at least facilitate, the infrastructure developments which are needed? Are international bodies sufficiently strong to assure the international transfers which are needed and to police them? Can anti-corruption measures such as those promoted by Transparency International be made strong enough to allow resources to be used for the purposes for which they were intended? Let’s discuss the solutions to these pressing problems next week.