The European: You recently said: “I am the new orthodoxy.” The orthodoxy against what?
Kenneth Binmore: The orthodoxy in economics has changed quite a bit. The story begins with classical economics like Jeremy Bentham and Adam Smith. In the 1930s, you began to see a de-psychologizing of economics. Paul Samuelson was a leader of the movement that came to be known as neoclassical economics. The idea was not that psychology does not matter but that psychology should be left to psychologists. For the purposes of economics, what happened in people’s head did not matter. This was of thinking was hugely successful and was later complemented by game theory, which was invented by John von Neumann in 1927. Nowadays, this approach has been augmented by reintroducing experimental psychology and ideas of bounded rationality. This is the new orthodoxy of which I am a part.
Let’s talk a bit about game theory. You have helped to popularize it, and it’s the foundation for much of your later work.
Game theory was ignored until the 1940s. Initially it was limited to the study of two-person zero-sum games: What is good for one person is bad for the other. That is not very interesting to economists. But in the late 1970s, it came back into fashion. I was a bit ahead of the curve at that time. I had been a mathematician but then became an economist.
Game theory is heavily predicated on the idea of rational actors and on the maximization of personal utility. And one of the charges against this kind of thinking is that we often care not only about ourselves but about other people.
The big mistake that people make is to confuse rational self-interest with selfish behavior. But that’s not what it means. Rationality means consistency: If you do A in situation X, and if you therefore should do B in situation Y, you will do B. Rational people won’t be inconsistent. But confusing consistency with selfishness is just silly. In neoclassical economics, when you talk about someone’s rational interest or the maximization of their utility function, it’s their own utility function. But what counts as utility for you might be the well-being of other people. Take St. Francis of Assisi: Utility for him would be feeding the hungry or mending the broken legs of pigeons. Genghis Khan’s utility function would presumably be very different. After I helped the British government organize their 3G auction, I set up a consulting company to make some money from my experience. The selfish thing would have been to keep that money for myself. But the reason I did the consulting was to finance my Research Centre. The billions of pounds generated through the 3G auction were largely put into the National Health System by the government. I am very happy to see money taken from fat cats and put it to good use.
“People aren’t nice all the time”
You recently and involuntarily played the role of the villain in a book by one of Germany’s leading newspaper publishers and political commentators, Frank Schirrmacher. He accused you of advocating for an egotistical society based on narrow-minded self-interest.
That man seems like an intellectual clown to me. The underlying problem is that such people are successful because they tell people what they like to hear. It’s harder to sell something that nobody wants to buy. I have to say: ‘Listen, people aren’t nice all the time,’ because that’s what the evidence shows – but that’s not the same thing at all as advocating an egotistical society.
Still, you presuppose the rationality and consistency of actors. Yet we know from behavioral economics that people often don’t behave very rationally at all. So it seems hard to take the theory and all its fine print and take it as a representation of the world.
One of the most well-known behavioral economists is Daniel Kahneman. He got the Nobel Prize the same year as Vernon Smith, and there’s a joke that Kahneman got the prize for showing that neo-classical economics doesn’t work and Smith got the prize for showing that it does. The truth is that sometimes it works and sometimes it doesn’t. If you put people in market situations and provide them with information and with time to think, they tend to behave very rationally.
So when does it not work? Because most situations aren’t like laboratory settings.
We aren’t very rational when we have to deal with uncertainties, for example. Gambling isn’t a rational endeavor. One of the reasons is that we are very bad at dealing with probabilities, so we have trouble learning from statistical feedback.
That sounds like most market situations. One of the lessons of the last five years has arguably been that we really underestimated uncertainties of risk in financial markets.
We should never have expected rational decision-making about risk, so-called Bayesian decision-making, to work in large worlds. Leonard Savage writes on page 16 of his famous book Foundations of Statistics that it would be “preposterous” and “utterly ridiculous” to use Bayesian theory in a large world. The world of finance and macro-economics is a large world. I denounce, absolutely denounce, the use of neoclassical theory in that context.
Has your opinion changed over time?
My opinion has not changed much on this subject. I remember addressing a meeting of the Econometrics Society in the United States in the 1980s. I said what I just told you, and I was basically laughed off the stage. It was very humiliating. And that wasn’t all: Whenever someone at the conference later appealed to Bayesian decision theory, they would all laugh again. Those people are still being paid large sums of money, but they are still as wrong as they were back then. After that experience, I gave up trying to influence financial economics. What would have been the point? Other people later took up the baton, but still have little influence.
“You could prove the laws of chemistry wrong by experimenting with dirty test tubes”
I want to talk to you about naturalistic theories of economics. You have borrowed quite a bit from biology to explain the interactions of economic actors…
In the 1980s, I departed from the rationality paradigm because it wasn’t working. Economists invented increasingly elaborate theories to explain various failure, but the truth remains that people aren’t like that. The behavioral economists were right in that regard. The reason markets work is not because people think rationally but because of the processes of evolution: Trial-and-error adjustment eventually leads to an economic equilibrium. This evolutionary view of markets is a rather unorthodox view among neoclassical economists. Even some of the behavioral economists are very critical because their studies have often highlighted inefficiencies instead of the efficient equilibria that rational theory predicts. But a problem with lab experiments is that they often don’t give people time to learn from their mistakes.
In other words: Don’t confuse laboratories with the real world?
Let me put it this way: You could prove the laws of chemistry wrong by experimenting with dirty test tubes. Behavioral economists should ask: Is my test tube dirty? But they are mostly satisfied with getting results that are inconsistent with the neoclassical orthodoxy. They would not get published if the peer-review system were not flawed. You have five reviewers, and they all think: ‘Oh, the other guys will check the details so I won’t bother.’ So the details never get checked.
What makes you convinced that your tubes are any cleaner?
I try very hard. One example: Behavioral economists have found that people are very averse to ambiguity and will even pay money to avoid those situations. I wanted to test that and ran my experiments and got very little ambiguity aversion. So I ran them again under different framing conditions. I ran them three times but couldn’t find anything.
You have also used evolutionary logic to venture into moral philosophy…
In the 1980s, I wrote a book called Playing Fair. It was full of equations and disquisitions on philosophical matters but it didn’t have any impact on philosophers at all – except in Germany. German moral philosophers have to read so much Kant that they all start to grow a bit tired of him. I am very critical of him, so the Germans liked that. American philosophers love Kant, he’s one of their greatest philosopher of all time, so they were very contemptuous. Eventually in 2005 I wrote Natural Justice, in which I took out all the equations and disquisitions and tried to explain how evolution might have generated our sense of fairness.
Your argument is two-tiered: There’s a common base, and a diversity of superstructures.
I see fairness as partly biological and partly social, like language. Noam Chomsky thinks that the deep structure of language is built into us and the particular language you learn depends on whether you live in France or Japan, for example. Fairness is like that. We all have individual preferences, and we also have shared social norms about what treatment of others is appropriate. Those norms are culturally specific and often context-dependent as well. When they are giving out Nobel Prizes, it is presumably fair to give them out based on merit. But when you feed the hungry, you want to give out food based on need. Fairness is different in different contexts.
Again, let me play devil’s advocate: Fairness is about deep values, not just about trial and error. “Fair” isn’t necessarily what most people take to be fair.
That criticism is ridiculous insofar as it assumes that I attribute selfish attitudes to people. I make no assumptions at all about what people have utility for. Such critics don’t seem to know the difference between utility and money, so they accuse me of advocating selfishness. It is true that I get some recognition from right-wing politicians but no recognition from the Left, but my conclusions are socially liberal. I have never voted for a right-wing party in my life! I vote left of center. I would vote for the Social Democrats if I lived in Germany.
Why do you think that is?
I don’t know why I am considered to be a conservative. It probably has to do with the fact that I defend morality not on rationality grounds but on evolutionary grounds. But the conclusions from that approach are left-wing conclusions. They are very egalitarian. Pure hunter-gatherer societies were incredibly egalitarian, without bosses, with food being shared equally. I think that is how biology made us; it’s the reason why we don’t like being told what to do. There is something wrong with people who like being ordered around, there is something mentally wrong with them.
Let’s talk more about naturalistic approaches to fairness, because it goes against the whole Kantian legacy of uncovering principles of justice through rational thought.
The game of life is very complex and full of accidents of history, so it necessarily has an infinite number of equilibria. You cannot use rationality or straight-forward evolution to decide which equilibrium is appropriate. As soon as we begin to talk about things that really matter in life, our emotions become involved and we cease to think rationally. Do you have a girlfriend? Then you know what I am talking about. The big achievement of human civilization is that we have found a quick way to adjudicate between different possible equilibria.
By invoking fairness and justice: We talk not only about possible social arrangements but about desirable ones.
Exactly. If we had evolved some other device, we would call that “fair” instead. Star Trek is quite telling in this regard: The good aliens always have the same morality that we do, and the bad ones all have different moralities. For the purposes of changing the world, my attitude is: Let’s be realistic about what people are like. That’s what people like Schirrmacher won’t do. And then let’s ask ourselves what mechanisms have evolved through biology or culture to enable human cooperation. These are the mechanisms we should use on a large scale.
One worry is that this understanding of fairness can easily slip into biological determinism.
My account is very non-deterministic. Evolution could have gone anywhere. Orthodox moral philosophy seems to think that the right things to do exist somewhere out there in the Platonic sphere and can be accessed through pure reason. When you look at the real world, you see that different things are regarded as fair in different places and in different contexts. It is true that I believe that the deep structure of fairness is the same everywhere and biologically determined – that is why I mentioned Chomsky earlier – but that the standard of interpersonal comparison is culturally specific. For example, In some societies, women are regarded as inferior. In the United States, slaves were counted as equal to two thirds of a white person for the purposes of political representation. But let me tell you a story about how I see fairness being used here and now in our own societies.: I was asked by the British government to advise them on the National Health System, which has sadly slipped into a dreadful state. There were calls at the time that all demands for health care should be met by the taxpayer. It was a ridiculous proposition, because there simply wouldn’t be enough money. Health care services must be rationed. In the United States, they are rationed by money – by your ability to afford health care – but I don’t want that.
So you need some conception of fairness to say: It’s better to spend tax money on this patient and not on this one.
Right. That decision should not be left to bureaucrats, because people have their own opinions about fairness. Should an old lady have to wait six months for her hip operation so that a smoker can be treated for lung cancer? That’s a tough question, and it requires a lot of debate.
“People need incentives to abide by principles of justice”
Intuitively, we often fall back on some explanatory principle: General utility, moral desert, et cetera.
Jon Elster did a study on collective bargaining for the Swedish government. This was before Sweden moved so heavily to the right. He found that when Swedes negotiated, they did not negotiate like Americans by saying: ‘I need ten dollars an hour.’ – ‘No, you can only have nine dollars an hour.’ They negotiated by invoking norms of fairness. Elster counted 24 different norms that people proposed at different times. What’s fair does not exist in some Platonic limbo, it’s partially an empirical question and partially a structural question. I always tell the story of the Statue of Justice: She is blindfolded because she can’t be allowed to know her position in society. That’s Rawls’ original position. She holds the scales to judge who is better off in what situation—-a judgment that varies between cultures and contexts. And she holds a sword, which philosophers tend to forget about. The sword! It reminds us that people need incentives to abide by principles of justice.
You argue a lot from the perspective of kinship…
That is the origin of our thinking about fairness. The philosopher Peter Singer has a book called Expanding Circles in which he argues that morality begins in the family. Our genes tell you to care half as much about your siblings as you care about yourself. An eighth as much about your cousins, and so forth. The next circle of morality encompasses a group: For example, a platoon in the army or a street gang. There’s a reason why gang members call each other “brother” and exchange blood. Then you expand the circle even more and you get to Jesus, who tells the story of the good Samaritan: You should treat everyone as a brother.
Today, our moral universe encompasses distant others or future generations, for example when we talk about environmental justice. It seems rather difficult to make those arguments from the perspective of incentives. We do something – reduce greenhouse emissions, for example – not because we expect something in return but because we feel some moral obligation.
This is a fundamental point, because it completes the move from right-wing thinking about evolution to left-wing thinking. In economics, we say that everything has to be incentive-compatible. Forget about selfishness, we’re talking about incentives. If you don’t make things worth people’s while, you are wasting your time. But there are many, many ways to make fairness compatible with incentives. The social and political question is which of those many possible incentive-compatible equilibria we want to operate in our society. Right-wing people concentrate on sustaining the existing equilibrium. Left-wing people concentrate on selecting between different possible non-equilibria that are not incentive compatible. However, it is necessary to have a foot in both camps to see that it’s possible to change our current status quo to operate a more liberal and socially just society that will actually work. What the Left has to learn is that not all desirable outcomes will work. Policies have to be incentive-compatible. What the Right has to learn is not to close their minds to equilibria other than the current status quo.
Let’s put this into more practical terms.
Take the example of traffic rules: If everyone drives on the left side of the road, it’s not incentive-compatible for you to drive on the right side, because you would crash into oncoming traffic. But if everyone drives on the right, it becomes incentive-compatible for you to do so. There are thus three possible equilibria: Everyone drives on the left, everyone drives on the right, or everyone drives at random. You would think that the third one isn’t a very attractive option. But I remember once telling this story to a bunch of Turks, who said to me: You have never been to Turkey if you think the random equilibrium is never used! But if we are stuck in such a bad equilibrium, how do we get to a better equilibrium? When there are many better equilbria, how do we choose between them?
Let’s put this in political terms: How can governments adjudicate between different possible paths?
The previous Labour government in the UK tried to reform the health system through targets. That’s exactly the kind of approach that I am so hostile to, because you tend to forget about anything that is not included in your list of targets, and you also tend to forget about the long-term consequences. The problem with idealists is that they ignore human nature. The problem with politicians is that they don’t pay attention to mechanism design. Robert Wilson worked on designing the electricity exchange in California. It was a brilliant design. Did they listen? No. So the state ended up with a system in which the electricity generators would basically charge as much as they wanted and the distributors were forced to buy it. That’s a recipe for high prices.
What are your own criteria for judging different norms of fairness – in the 21st century, five years after the collapse of Lehman Brothers, et cetera?
Why do you mention Lehman Brothers?
Because the experiences of the financial crisis arguably had an effect on the moral intuition of many people.
I have been absolutely appalled by the financial sector. Right-wing people would say that perfectly competitive markets are efficient. That’s true, but it is a theorem. In the real world, very few industries are perfectly competitive. When an industry is imperfectly competitive, it needs to be regulated. In the UK, the regulatory agency was staffed by people who had made their money in finance — and a left-wing government allowed that lack of oversight to happen. That’s like saying: ‘We want to protect ourselves against theft, so we’ll put the burglars in charge of security.’ It was outrageous. You mustn’t let the lawyers near regulation either. There should have been proper regulation and proper mechanism design. I have been saying that forever, but if they laugh me off the stage during an academic conference then surely nobody in finance will listen to me. Or take this story: I’m a pensioner now. They changed the interest rate on my bank account and hid it in the small print. Now, I can still read small print – my wife can read it even better – and I saw that they had changed the rate. I thought to myself: ‘Are you mad? Did you think I wouldn’t notice?’ But in fact, most people probably would not notice. That’s stealing from old people!
Let me try again: What social values do you think we have to bake into our system?
The welfare system should essentially be based on utility, weighed according to some criteria and compatible with incentives. There you have it: Choosing the equilibrium that maximizes a utilitarian social function is socialist, and confining one’s choice only to equilibria because only equilibria are incentive-compatible is capitalist.
Did you like the conversation? Read one with Jacques Attali: “Clever capitalism is by definition altruistic”