By Mayank Arora

“Adam, Adam, Adam Smith
Listen what I charge you with!
Didn’t you say
In the class one day
That selfishness was bound to pay?
Of all doctrines that was the Pith,
Wasn’t it, wasn’t it, wasn’t it, Smith?”
(Stephen Leacock, Hellements of Hickonomics, 1936)

The above lines may mistakenly charge Adam Smith, the Father of modern economics, with unequivocal support to the idea of selfishness. For the most part, modern economics has persisted with the narrow assumption that “every agent is actuated only by self-interest”. The idea was brought to the limelight as a basic premise of economics by another well-renowned economist, Edgeworth, in 1881.

The Irrationality of Rationality

The confined view of rationality regarding humans has strong relevance while carrying out activities like trade and exchange. Although rationality must not be ignored, understanding other key drivers behind transactions could widen our approach to comprehending and applying economics.

Although rationality must not be ignored, understanding other key drivers behind transactions could widen our approach to comprehending and applying economics.

For instance, why do some universities conduct exams without an invigilator? Or why do most people value products they use beyond their monetary value (such as a coffee mug or passes for a cricket match)? Or even with no waste bins, why do some roads stay significantly cleaner than the others?   

To answer the above questions, one would have to move away from the usual notion of maximising self-interest. Much literature has come to light during last few decades by behavioural economists and psychologists such as D. Kahneman, A. Tversky and others, in the field of psychological sensitivity. They suggest that various characteristics determine the choices that one makes. Most importantly, they point out that these reasons are beyond the maximisation of self-interest of the individual. Some of these characteristics include attitudes of people, such as higher aversion to losses of wealth and possessions than to identical amounts of gains, or a bias towards an unlikely or a rare event, or any limitation of memory due to biological factors.

The Complexity of Human Motivation 

Consider the works of Dan Ariely, a reputed behavioural economist and author of Predictably Irrational. He shows that in a knowledge economy (as compared to an industrially-driven economy), people are motivated to work when they are recognised for it.

He shows that in a knowledge economy (as compared to an industrially-driven economy), people are motivated to work when they are recognised for it.

This could be through awards or even a sense of accomplishment. Sometimes, when people put in hard labour to achieve a task, it gives them a satisfactory sense of ownership. Ariely carried out another interesting study in culturally divergent economies. It shows that the same people tend to become less dishonest when they are reminded of moral codes such as the Bible or Ten Commandments culturally divergent economies.

Factors such as ownership, challenge, identity & pride improves the quality of work in an organization.

For the development of an economy, not only strategic but ethical factors should also be taken into consideration. | Photo Courtesy: Visualhunt

These results may or may not be replicable across all strata of society. It clearly suggests that paying attention to factors such as meaning and creation, challenge, ownership, identity and pride, is a key differentiator in improving the quality of work. In the Indian context, the knowledge of these behavioural patterns can improve productivity and work-related ethics. This is especially so among Indian bureaucrats, otherwise infamous for lethargy and brazen corruption.

Besides, non-economic factors such as the dispersion of science, mathematics and culture, also play an important part in any individual, as well as nation’s development.

An important example is the recent discovery of the Higgs-Boson particle, commonly referred to as the God particle. The discovery is credited to Indian physicist S N Bose. The story came into the public eye through the media. Consequently, it had a positive impact on the reputation of Indian scientists worldwide.

In addition, socio-cultural events, like cricket matches between India and Pakistan and the popularity of Indian films across the globe, carry a significance that is far beyond a simple game or a mere fictional story. They also bring out the lives of people as they actually are, and not just as they are seen through the prism of cultural perceptions. Though some of these practices have been tried earlier, considering these factors and using them innovatively is very important. It is the key to building relationships and can also be applied to policy-making, especially in the areas of education and foreign diplomacy.

Public Policy – Time to Rethink Strategies

Similarly, social norms of a particular region need to be accounted for while developing public policy. This consideration is equally important in ensuring their effective implementation. For instance, many people in Mumbai have developed a habit of adhering to a queue, especially at the Railway Stations. In contrast, in cities like Lucknow or Allahabad, a heavy jam is an exception that people are not used to.

Another important example of applying behavioural sciences is in the context of the Indian food policy. There are serious claims that the food distribution does not reach the audience it is targeted at. In countries like Japan, however, people are programmed to be more dutiful and responsible while selling food. Producers, themselves, tend to ensure that the food gets distributed without any leakages. Heavy leakages in the Indian system are a result of the assumptions made while drafting the laws. It was presumed that ‘robots’ are delivering food to the poor. The fact that the food would be distributed by ration shop owners was completely overlooked. Although some of these attitudes do change over time, existing laws need to address the discrepancies between behaviours across different societies. This will result in better policy implementation as well as easier acceptability among people.

To conclude, there is an urgent need to wage a battle in favour of a broader understanding of rationality. For this, one has to go beyond the strategic reasoning of viewing all actions in mere dichotomous terms. We also need to look at other factors such as empathy, generosity, ethics and psychology to arrive at better decisions. Getting this right would be as important as getting other policies of trade and money right.

Mayank Arora works as an Academic Associate at Indian School of Business and assist courses such as Financial Analytics, Managerial Economics and Micro finance. He has also worked as an Analyst in Pricewaterhouse Coopers for 2 years and plans to do research on areas of economics and public policy.

Featured Image Credits: Jay Wennington via Unsplash

Posted by The Indian Economist