The Psychology of Economics

Researchers in economics recognize the limits of money as a gauge for happiness. Their studies demonstrate that appreciation of the social environment and satisfaction from giving comprise the “fuel” that will drive the economy of mutual guarantee.

Every scientific method begins with a premise. In that, economics is no exception to the rule. While hard sciences engage in minerals, plants, and the cosmos at large, economics engages in something far more volatile and unpredictable: human nature. One such premise in economics is John Stuart Mill’s “homo economicus” (the economic human). Roughly speaking, the goal of the economic human, namely each of us, is to obtain the maximum pleasure for the least effort. And what does the economic human enjoy? Consumption of goods. The more goods we consume, the more we enjoy. Additionally, we are not keen on hard work, so we weigh everything by the measure of exertion required to obtain it. The economic human wishes to maximize benefit by choosing the alternative that best serves one’s preferences under the budget limitations.

Behavioral Economics: Money Isn’t Everything

Until recently, economists asserted that utility could be measured by material possessions. That is, the more we consume, the more we enjoy. This approach has led to our current state, in which money is the ultimate gauge of success.

According to this approach, man is a rational being—a key concept in economics. A rational person will weigh all the options and finally choose the most rewarding in terms of material resources, money, or products that can be measured with money. Thus, we have developed a societal view that money provides a gauge with which to measure a person.

However, researchers in behavioral economics have shown that people take many other elements into account besides money when making decisions. An example of these elements can be found in a well-known experiment in behavioral economics, called the Ultimatum Game. In this experiment, two participants must share a sum of money between them, say 100 dollars. The first participant offers the second one part of the sum, and if the second participant agrees, they .divide the money accordingly. If not, neither gets a penny. If indeed money were the only element taken into account, the second participant would have agreed to receive whatever was offered, even one dollar, while the other party receives the rest, since the receiver would have had one dollar more than before. However, in many cases, the participants agree only on equal distribution, and are willing to relinquish much more than one dollar if they feel that the initial offer is unjust.

The Study of Happiness

Professor of Economics at the Hebrew University of Jerusalem, Eyal Winter, explains that while it is clear that man should aspire for economic welfare, often defined as “well-being,” in classic economics the assumption is that a person strives to maximize the material gains because for most of human history, economic success was tantamount to survival. As a result, a mechanism evolved within us, which drives us to obtain the means that allows us welfare, expressed in money.

However, researchers of positive psychology, Prof. Ed Diener and  Robert Biswas-Diener, PhD, summarized dozens of studies, and found that “There are mostly small correlations between income and subjective well-being (SWB) … although these correlations appear to be larger in poor nations.” Moreover, “People who prize material goals more than other values tend to be substantially less happy, unless they are rich. Thus, more money may enhance SWB when it means avoiding poverty and living in a developed nation, but income appears to increase SWB little over the long-term when more of it is gained by well-off individuals whose material desires rise with their incomes.”

Another interesting study, “Lottery winners and accident victims: Is happiness relative?” compared the level of happiness among lottery winners and people who have been made handicapped by accidents. It found that approximately a year after the event, a person who has won the lottery was not happier than one who has been crippled by a tragic accident.

The Satisfaction in Giving, Cooperation, and Fairness

While material well-being has evolved as a basic need, many other needs have developed in us over thousands of years of living in social frameworks. One such primary need that has been formed due to leading a social life is the need for giving and for reciprocity. Human societies have always worked in cooperation because it enhanced their sustainability. Cavemen were far more successful in hunting and protecting themselves and their clans when they collaborated and lived a communal life. An individual who did not cooperate risked being excommunicated, which often meant certain death.

The tendency to cooperate in order to derive satisfaction still exists within us no less than the above-described mechanism that tends to our material well-being. An often-played game in behavioral economics is known as the Dictator Game. In it a player receives a sum of money and is supposed to decide how much of it to keep. Approximately 80% of players give some money to the other player, and about 20% of those split the sum evenly. This demonstrates how giving, cooperation, and fairness bring us more satisfaction than the satisfaction that comes with money.

Social Influence

Life in families, clans, communities, and various forms of groups have led humans to measure themselves in relation to their social environment, and make decisions based on emotions that arise through one’s relations with the social environment. In a research on participants in the above-mentioned Ultimatum Game, the participants’ brain activity was monitored when they had to decide whether to take the amount of money offered. It turned out that in the process of receiving the offer, two different areas were working in the brain—the area in charge of making rational decisions, and the area in charge of anger. The more the participant felt that the offer was unfair, the more the activity of the area in charge of anger prevailed over the rational consideration, and the participant tended to reject the offer and remain without the money.

One always compares oneself to the social environment, comparing one’s own situation to one’s reference group. Because our social nature causes this modus operandi, emotions of contentment and satisfaction—or indifference, frustration, or anger—join the rational considerations. These considerations result from our relations with our social environment. Such emotions may lead us to make choices that yield negative results toward us and toward society. This was demonstrated in many studies, such as that of Professors Sara Solnick and David Hemenway, “Are Positional Concerns Stronger in Some Domains than in Others?” In their study, they claim, “Given a constant purchasing power of money, almost half of respondents would prefer to live in a poorer world, earning $200,000 rather than $400,000, if most other people were earning $100,000 rather than $800,000.”

However, the combination of comparing and gauging, along with the influence of the environment, can lead us, as well as society, to very positive results. On April 8, 2011, Justina Wheale of The Epoch Times wrote, “In a new study published in the Journal of Personality and Social Psychology, Dr. Karl Aquino and his team found that after witnessing exceptionally altruistic acts, people are more likely to perform charitably themselves.” Dr. Aquino and his team also wrote, “They have some sort of emotional reaction—they’re inspired, they feel somewhat awed by the behavior, they may get severe physiological reactions. A lot of these changes can then lead them to try to do good things for others.”

Emotional Contagion

We affect each other in more ways than we realize. Our influence on one another is not only what we see and measure in others. Studies have shown that we “emotionally infect” one another, and are “infected” by them even without noticing it. Beyond the fact that we detect people’s expressions and deduce their emotional states, there are cells in our brain called “mirror neurons,” which react to seeing other people’s actions by activating the same areas in our own brains, as if we were performing that same action.

But are we influenced only by the people we meet? It turns out that we are influenced by people we don’t even know. In the book, Connected: The Surprising Power of Our Social Networks and How They Shape Our Lives—How Your Friends’ Friends’ Friends Affect Everything You Feel, Think, and Do, Dr. Nicholas A. Christakis and Prof. James Fowler introduce the concept that all humans are meshed in social interconnections and networks. According to Christakis and Fowler, important aspects in our lives are influenced by people up to three degrees of remoteness from us, even if we don’t know them personally.

“Our own research has shown that the spread of influence in social networks obeys what we call the Three Degrees of Influence Rule. Everything we do or say tends to ripple through our network, having an impact on our friends (one degree), our friends’ friends (two degrees), and even our friends’ friends’ friends (three degrees). …Likewise, we are influenced by friends within three degrees.” Our health, wealth, and indeed happiness are largely a function of what people three degrees of remoteness from us think and do.

The Crisis and the Influence of the Social Environment

These connections become more complicated and more prominent as the world becomes increasingly globalized. The tightening connections among the various parts of the world have turned the human society into a single global and integral system, causing every element to become dependent on every other element in the system.

Lecturers in Happiness Economics often ask the audience to see where their clothes and gadgets are made, thus demonstrating how dependent we are on the world. But the connection between all of us is far broader and deeper than our clothes or smart-phones. In his depiction of the modern world, economist Geoff Mulgan wrote, “The starting point for understanding the world today is not the size of its GDP or the destructive power of its weapons systems, but the fact that it is so much more joined together than before. It may look like it is made up of separate and sovereign individuals, firms, nations or cities, but the deeper reality is one of multiple connections.” Under such conditions, the traditional economy, which is based on individualism, isn’t working any longer, and today’s global crisis is proving it each day. It is impossible to pursue personal gain without including the myriad connections that affect each and every one of us.

In 1996, renowned sociologist, Manuel Castells, argued persuasively that “…a new economy emerged around the world.” We can use the changes that the economic system is undergoing to balance our material needs with our social needs. However, when we examine today’s society, we see that seeking material benefits and personal gain are disproportionally more dominant in society and in the media than ever before. This is a manifestation of consumption that has grown out of control.

An average person in the U.S. comes across approximately 600 commercials daily, all carefully crafted to convince us that the satisfaction and benefit from buying the advertised product will make us happy. In truth, the only satisfaction obtained is that of the advertisers. Also, rewards are often given for personal success, albeit that success often comes at the expense of others. It follows that a person will do the utmost to gain and feel superior to others.

We live in this world buffeted by two conflicting influences. We are fast becoming aware that we are unable to provide for all of our own needs, but need to depend on others, who in turn depend on us in the same way. The media, however, relentlessly pitches to us the idea that the more each of us has, the more successful and more superior to others we are. These messages surround us, although by now it is quite clear that we are not self-sufficient and that wealth is not the only means toward happiness.

On the one hand, we always compare ourselves to others, and when one person has more than others, it will arouse envy and make others wish that person to be unsuccessful. On the other hand, attempts at communism, where everyone has the same, have failed bitterly. In the twentieth century’s experiment with communism, the coercive leveling of people’s material assets, regardless of individual needs and without proper education and explanation—necessary components of voluntary change—resulted in the death of tens of millions, leading to the ultimate demise of the regime and an enduring aura of negativity around the entire idea of this philosophy. Forced solutions do not work, especially when they radically differ from their predecessor. We should carefully heed that lesson now that humanity has reached a tipping point in its evolution and is beginning to move from the failed, contemporary economy, into a new, balanced economy, based on a connection of mutual guarantee.

We cannot detach ourselves from society, as it provides us with all that we need for life. Accordingly, any paradigm or attempt at solving the global crisis with tools from the old economy is bound to fail, as it derives from a competitive, self-centered approach, which is quickly becoming obsolete. Instead of trying to “force” our existing models on reality, we should try to change the economic system and the human society to match the newly emerging reality. Essentially, it is a psychological transformation. Just as humans developed mechanisms that assist us in coping with the elements, today we can adapt our thinking into congruence with the conditions of the 21st century.

Social Justice and Equality

Sociologist, Ulrich Beck, wrote in his book Brave New World of Work, that in the new society, people will conduct “civil labor” for the benefit of society. Yet, how can such a society bring satisfaction and a sense of fulfillment to people?

The new society must recognize that if we measure ourselves in relation to others, we will never feel satisfied or that we have obtained social justice. A society that wishes to exist in peace and prosperity must see to each person having the practical possibility of leading a full and balanced life, liberated from the need to be concerned with providing for staples and bare necessities. As described above, material well-being can induce only a certain level of happiness, and society neither should nor can equalize everyone financially. Rather, there should be distribution based on a relative, idiosyncratic equality, in which each receives according to one’s unique needs for a reasonable, dignified existence. Such a “normative” standard of living will be determined as one that is guaranteed for every person—mutual guarantee. That is, the standard of living must be higher than the poverty line, and defined in a collaborative process through a “round table” form of deliberation. The equality among people will be expressed not so much in the amount of goods or funds allotted each person, but more in the fairness of the distribution and its transparency.

Moreover, the sense of equality among people will be expressed in everyone having the ability to obtain complete self-realization and personal fulfillment, and in the awareness that the mechanism of mutual guarantee is what creates the equality and the so-needed sense of fairness. This sensation will be in all levels of human relations: interpersonal, between person and state, and between the economic paradigm and the social one.

Looking Ahead—a Change We Can Do

This mechanism of mutual guarantee will diminish social gaps and will ultimately eliminate them. The guaranteeing of people’s basic needs for reasonable existence is the key difference between the economy of mutual guarantee and the current economics. We have already seen that individuals have many needs that cannot be met in an environment that does not encourage their expression and fulfillment. The more the social environment presents models of the joy that exists in social relations, in sharing, and in fairness, the more individuals will be able to enjoy life in a society where such relationships are the norm. This is the key to the change, As Dr. Aquino is quoted in the above-mentioned publication in The Epoch Times, “We suggest an alternative technique may be to highlight examples of extraordinary goodness. They’re rare by definition; they don’t happen every day. But if we could identify these and make them much more prominent, then it could get people to think differently about their lives and about others, which may influence them to do good.”

Indeed, there are ways to emphasize acts of altruism and to see how the change affects each of us. For example, if a list of the 100 people who contributed to society more than anyone were to constantly be advertised, we would see how the same abilities that led people to gain while exploiting others, now lead them to work for the good of society. The same competitive drive that causes us to want to succeed at others’ expense will lead us to realize our potential for the respect and esteem of society. In addition, the closer the personal interest and social benefit become, the more a person will be granted social and public support to realize him or herself.

The new “fuel” will change our nature from materialistic and egoistic into altruistic and prosocial. The appreciation of the environment and the satisfaction in giving are the keys to people’s choosing to live their lives within an economic and social system of mutual guarantee.

There is a twofold benefit in that change: activity to benefit society will yield a society that exists in peace and prosperity, providing a supportive environment to all its members. Additionally, individuals will be able to fully realize their personal potentials and goals, thus gaining personal satisfaction, as well as public appreciation.

In the current chaotic environment, such a vision may seem vague or unreal, but merely striving for mutual guarantee will make it clear to us that all it takes to achieve it is a psychological shift.

Nicholas A. Christakis and James Fowler, Connected: The Surprising Power of Our Social Networks and How They Shape Our Lives—How Your Friends’ Friends’ Friends Affect Everything You Feel, Think, and Do (NY: Back Bay Books, 2011), 26

Mulgan, Geoff, Connexity: Responsibility, Freedom, Business and Power in the New Century (revised edn.) (London: Viking, 1998), 3

Castells, Manuel, “Information technology and global capitalism” in W. Hutton and A. Giddens. (eds.) On The Edge. Living with global capitalism (London: Vintage, 2001), 52

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