DURING the last US presidential election campaign, Donald Trump and Hilary Clinton both promised to “protect” America against foreign imports. In Europe, right-wing populist politicians are gaining ground by claiming they will reduce immigration to create more jobs for local people. Left-wingers, meanwhile, promise to tackle growing wealth inequality by taking from the rich and giving to the poor. All these ideas reflect a shaky grasp of economics. Nevertheless, they are often attractive to voters. That is no accident.
Most of us have little or no education in economics, but that doesn’t stop us holding beliefs about all sorts of things from the benefits of international trade, the effects of immigration and the origins of inequality, to the power of big business, the consequences of regulation and whether the state should provide education, transport and healthcare. These “folk-economic” beliefs are often vague, . But they are not random – people everywhere seem to have similar intuitions. It is as if the human mind is designed to misunderstand the mass-market economies we have created.
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As a psychologist, this intrigues me. In my latest book, , I argue that folk economics has its roots in human evolution – and has profound consequences for today’s world. In modern democracies, political parties differ mostly in terms of their economic policies, meaning that politicians can capitalise on our mistaken intuitions to gain support. Fortunately, knowing where these beliefs come from, and the forms they take, can help us make more savvy economic and political judgements.
For centuries, economists have bemoaned the economic ignorance of ordinary people. It wasn’t until 1996 that the chasm in thinking was revealed when the became the first to ask both groups the same questions. Although the views of experts varied somewhat – economics is complex and not an exact science, after all – they were in stark contrast to those of the public. For example, 50 per cent of economists thought trade agreements had helped to create jobs and just 5 per cent believed they led to job losses, whereas ordinary people took a far more negative view – 17 per cent and 54 per cent, respectively. Likewise, while 69 per cent of the public saw excessive executive pay as a reason the economy wasn’t doing better, just 12 per cent of economists did.
“It’s as if the human mind is designed to misunderstand mass-market economies”
Despite these findings, there are surprisingly few systematic studies of folk economics. in why people’s perceptions are so awry. But evidence from psychology and anthropology does shed some light on the phenomenon. It reveals that people have an intuitive mental template for how exchange, the action that lies at the root of economic activity, should occur. This “exchange psychology” is not simply shaped by self-interest, the media or the political arguments we are exposed to. It is seen in people from early childhood and has been documented in a diverse range of cultures. This suggests that our naive economic beliefs, like many of our social and political preferences, are an outcome of evolution.
, Michael Bang Petersen of Aarhus University in Denmark and I argued that the human mind evolved to think about economics in specific ways. Our intuitions about production and exchange are adaptations to the particular context in which our species developed. As a result, they are unsuited to the economy of the modern world, which appeared very recently in evolutionary terms.
The key factor is that humans, in contrast to most other animals, evolved to be highly cooperative. Hunting, foraging, community defence and even parenting were done in groups. There was some division of labour, because of individual differences in talent, but not much specialisation. And our ancestors shared resources, especially when it came to goods with highly variable availability, such as game. Trade mostly took place between people who knew each other, or between groups that shared repeated exchanges. Technology was simple enough that they could track how much effort was involved in making most things. And verbal communication provided rich information on the behaviour of others, which was used to select the most cooperative partners with whom to do business.
The way we think about exchange is the result of millennia living in these conditions. In recent years, numerous experiments using economic games have highlighted these psychological effects. For instance, we have a strong sense of fairness, and intuitively expect and prefer that the proceeds of a joint effort be shared in proportion to each participant’s contribution. Indeed, free-riding – reaping the benefits of trade or joint effort without paying a cost or contributing – triggers anger and strong aversion. We also prefer to trade with known partners and tend to avoid purely anonymous transactions. Not only that, but we intuitively consider it beneficial to extend small favours to trading partners rather than exploiting their weak positions, because our psychology is built on expectations of long-term interactions.
“What we fail to see is the power of consumers as a whole”
Evolved dispositions such as these enabled trade to eventually expand from small, local exchanges between known partners, all the way to global commerce networks. At each point in this process, people widened the circle of trade by using the mental tool-kit they already had. For instance, modern global communication enhances our ability to get information about possible partners and select the trustworthy ones. This leads to a paradox. Our evolved exchange psychology made mass-market economies possible while simultaneously making it very difficult for us to understand them.
The scale of modern economies is one major stumbling block. In the small communities of our past, everyone could monitor the effort each participant put in and how much they received in return – who stalked the prey and who killed it, how long people foraged, how much they ate and so on. But that is not the case with complex trade networks and modern technology. What happens in a mass-market economy depends on the actions of thousands or millions of people. As our psychology focuses on individual agents, we fail to see these aggregate effects.
This helps explain our negative attitudes towards large retailers like Walmart, Carrefour, Tesco and Aldi. Everyone knows they make big profits. However, they also generally sell goods cheaper than their smaller competitors. We can all see that we gain a little – by buying an apple for 40 cents instead of 50 cents, for example – but we cannot detect the aggregate amount of these small savings, the impact on society as a whole. Most people don’t realise that this aggregate consumer benefit can be hundreds or thousands of times larger than the profits made by large retailers. Of course, that doesn’t necessarily mean we shouldn’t tax their profits.
Similarly, we mistakenly believe that big corporations are all-powerful. Because we intuitively think of exchange as taking place between two individuals, with the stronger, more formidable partner able to dictate terms, we tend to believe that corporate giants like Apple or Samsung “control” the market. We reason that they do not care whether an individual consumer buys their product, so they can fix prices to ensure they make vast profits. What we fail to see is the power of consumers as a whole. No matter how big a company, whether it thrives or dies depends on the aggregate of millions of individuals choosing to buy its products, or not. As a result, many businesses that once appeared to control a market – Nokia, Kodak, Sears and others – are no longer dominant.
This same exchange psychology makes it tempting to believe that government intervention in markets can control prices. Our intuition tells us that regulation will work because it seems to redress the balance of power between the producer and the consumer. But this kind of thinking again misses the bigger picture. A landlord, for example, cannot usually simply dictate prices, because renters generally have a choice of where to rent and thus influence the behaviour of landlords. Price regulations disrupt these incentives, often with perverse effects. Attempts to control food prices, for example, generally result in black markets. Similarly, rent control usually makes housing rarer and unaffordable for newcomers because landlords will almost always demand the highest possible price. In addition, it gives landlords no incentive to maintain housing stock, so renters end up getting poorer value for money.
Greedy exploiters
Our moral intuitions also shape our folk-economic beliefs. As 18th-century economist Adam Smith pointed out, prudent self-interest motivates people to produce and offer the goods and services we need. Yet, in most cultures, the merchant who buys cheap and sells dear is widely seen as a greedy exploiter. Such moral condemnation stems largely from a lack of information. Modern market transactions tend to be one-offs between partners we know little about. This clashes with our intuitive preference for repeated trade between familiar partners – a form of exchange in which we can better understand their motives and constraints.
Another reflection of the impersonal nature of modern economies is what Paul Rubin from Emory University in Georgia calls “” – a fear of markets and suspicion that free competition will have negative social effects. Our mistrust is particularly intense when considering “markets” in sensitive goods, such as organs for transplant or babies for adoption. But it extends much further, to healthcare, housing, education and transport – where we often fear that market processes will lead to inefficiency or tragic inequality.
Sometimes such fears may be justified. Nevertheless, our psychology explains why emporiophobia is so common and so easily invoked for political ends. In the past, as cooperators within small communities, it was to everyone’s benefit (and evolutionary advantage) to provide each other with assurance against the vicissitudes of fate. Our ancestors would share food with those unable to acquire their own whether through bad luck or because of illness or old age. By contrast, modern markets seem to exclude such motivations, leaving people fearful that there will be no resources for the weak or the unlucky.
Our instincts around sharing can be seen in popular notions about wealth and poverty, too. Throughout most of human history, resources were shared largely in an egalitarian manner, based on need and a person’s contribution to the joint effort. Crucially, if someone had more, others had less – it was a classic zero-sum situation. This helps explain both why we tend to see wealth as a pie of fixed size and the appeal of political arguments for taking from the rich to improve the lot of the poor. Yet, in modern economies, wealth is not a fixed resource. The world as a whole is much richer now than it was two centuries, or even 50 years, ago.
A major contributor to increasing global wealth is trade, yet here again zero-sum thinking undermines our understanding. The classic mistake is in believing that importing from other nations makes your nation poorer. The obvious solution is protectionist policies: impose tariffs on foreign imports if they are cheaper than home products and aim for independence in commodities such as energy and food. But in fact, international trade is not zero-sum – the more of it that happens, the more resources there are for everyone. What economists call “comparative advantage” means that all countries are better off concentrating their efforts on goods they are most efficient at producing, and trading for others.
Scrounger or just unlucky?
Admittedly, while international trade increases the overall wealth of nations, some individuals may not benefit. Carmakers in the US, for example, might welcome President Trump’s imposition of tariffs on cheaper Chinese vehicles in the hopes that it can save their jobs. But American consumers will pay as car prices increase. It is also worth noting that a lack of independence in certain sectors has not held back some of the world’s richest nations. Singapore has few energy resources, yet is a leading manufacturer, and energy-rich Norway gets by very well importing commodities such as coffee and wine.
Economists may show little interest in folk economics but successful politicians, both left and right, instinctively grasp that they can gain influence by speaking in ways that chime with these intuitions. That’s why some describe the recipients of welfare benefits as lazy scroungers, while others portray them as victims of bad luck. One type of discourse activates our aversion to free-riding, the other our intuitive preference for insurance against uncertainty. Our exchange psychology , and we respond to whichever echoes the political beliefs we hold.
This means that folk economic intuitions are not just misleading, they are also powerful, because they can be used to justify conflicting conclusions about the world and then direct policies for change. But we are not entirely at the mercy of these evolved ideas. A better understanding of economics will help us see beyond them. So too will the realisation that the human mind is instinctively attracted to certain economic beliefs. Forewarned, we should be less vulnerable to manipulation when politicians try to seduce us with attention-grabbing lines.
Seven flawed ideas
Evolution has left us with “folk economics” beliefs that underpin some major misconceptions about mass-market economies, in particular:
- Wealth is a fixed-size pie – the poor get poorer when the rich get richer
- Big corporations can impose prices on consumers
- Importing from other nations makes our own one poorer
- Prices can be controlled with government regulation
- Free market competition will have negative social effects
- It is better to trade with known parties
- We should be suspicious of the profit motive
This article appeared in print under the headline “It’s the economy, stupid!”
