Complexity, Morality and our Collective Economic Fate.

I’ve been reading a lot of Paul Krugman lately, given the state of the economy and such. If you have been following him, you may have noticed one of his repeating refrains, “Economics is not a morality play.

To really understand what he is saying, you have to understand the evolution of human morality and how moral dictates play out in a complex system like the economy.

We human beings have evolved a keen sense of moral accounting. It isn’t that hard to see how a highly cooperative species, such as ours, would’ve benefited from keeping track of who was being good to the group and who was shirking his or her responsibilities. We are by no means the only primate species to keep track of who is doing what within the group. But we are the only species to engage in what researchers call, “altruistic punishment,” to keep each other in line. We are essentially willing to punish what we perceive as unfair behavior even if it is at our own expense. 

Most of the evidence for this comes from ultimatum games, in which one person is given $100 to split between themselves and another. If the other person agrees to the ratio of the split, both people will get the agreed amount. If the other person does not agree, neither will get anything. Given that this is essentially free money, it would seem logical to accept any amount however small. However, in experiment after experiment people reject offers that they deem to be an unfair split, thus not only depriving the other person who made the unfair offer, but themselves as well. 

The moral notion of account balancing or Karma, is grounded in this universal human instinct to punish unfair behavior at all costs.

According to Jonathan Haidt, a pioneer in the study of moral psychology, such karmic accounting is at the core of the Tea Party and Conservative economic logic. As Krugman points out, the whole movement itself was spawned by CNBC’s Rick Santelli’s 2009 rant about the unfairness of bailing out your profligate neighbour who cannot replay his mortgage. Conservatives, Haidt explains, believe that one way or the other the karmic account must always be balanced. Those who were responsible and made sound decisions must be rewarded and those who spent without regard to consequences should get their just desserts. To bailout failing banks or your neighbour who is in foreclosure, is, in this framework a rupture of the karmic law. The economic prescription derived from this moral framework is austerity or, - we must all live within our means and let the reckless debtors pay for their sins. 

The only problem is, the economy is a complex system made up of networks of interconnected individuals and institutions. The laws that apply within this system are feedback and feedforward loops, not karmic account balancing. This is what Krugman means when he says, “Economics is not a morality play.” Applying karmic account balancing to a complex system will not punish wicked irresponsible debtors. Why? Because as Krugman, explains, in a complex system one person’s debt is another person’s income. Within the system as a whole the balance that really matters is not a karmic one, rather the balancing of debt and income. 

Krugman again:
“The key thing to bear in mind is that for the world as a whole, spending equals income. If one group of people — those with excessive debts — is forced to cut spending to pay down its debts, one of two things must happen: either someone else must spend more, or world income will fall.”
Collective belt tightening, which on the face of it seems like a sound moral prescription, thus produces collective loss. What we are seeing in the economy is altruistic punishment writ large.