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By Antara Haldar on the TLS

The plot of mainstream economics has been monopolized for generations now by the fictional character known as homo economicus. Homo economicus has the cognitive capacities of a superhero: his ability to churn unlimited information and unflinching self-knowledge into instant and accurate decisions is infallible. But he differs from your everyday superhero in one key respect: he is in no way committed to using his powers to do good. His calculation of cost and benefit to relentlessly maximize utility is entirely clinical, and he is laser-focused on his own material self-interest rather than fluffy considerations such as social moorings. Of course, we almost never encounter such people in the real world. Yet the dominant strain of what is known as “rational choice theory” – the model that lies at the heart of mainstream economics – has placed this unsympathetic antihero squarely at the centre of economic thinking, making rationality in effect synonymous with selfishness.

Happily, in recent years, we have started to glimpse what the arc of character development of the agent at the centre of economic analysis might look like – and how it might eventually evolve beyond homo economicus. Beginning with the collaboration – now chronicled by Michael Lewis in The Undoing Project – of the psychologists Daniel Kahneman and Amos Tversky, the stick figure that had for so long populated economics has started to be filled out. Their work helped spawn a whole new field – behavioural economics – that identifies a plethora of instances where the standard assumptions of economic theory are shown not to operate. In particular, human beings appear to be both computationally inferior (lacking both complete information and self-control) and morally superior (motivated by things other than material self interest) to the robotic homo economicus.

By Antara Haldar on THE PROJECT SYNDICATE

The hubris of much liberal legal thinking has been to assume that once a rule-of-law regime is in place, it will be almost perpetually self-sustaining. But the mounting constitutional disarray in the Anglo-American world points to fundamental flaws in the prevailing liberal theory of institutions.

By Antara Haldar on THE ATLANTIC

From high-end coffee shops to microfinance lenders, rapid growth can cause companies to lose the trust and loyalty that brought them success in the first place.

Devotees of Stumptown Coffee, a high-end roastery with fewer than 10 total locations in four select cities, pride themselves on avoiding mainstream coffee chains. What they are probably oblivious to, however, as they sip their mochas and cold brews, is that their haven of individuality may soon be just another chain in the Phoenix airport. What they might suspect even less is that the story of microfinance in Bangladesh may foretell the fate of their preferred coffee shop.

Stumptown, the iconic small-scale brand, was recently acquired by Peet’s, a chain with a couple hundred locations. On a buying spree, Peet’s has been in the news for taking over Intelligentsia, another well-loved and self-consciously indie coffee brand. And JAB Holding Company, the conglomerate that owns Peet’s, announced last year that it was acquiring the at-home coffee-brewing system Keurig.*While Peet’s offers reassurances that Stumptown will retain its authenticity even as it attempts to scale, precocious corporate growth has been shown to corrode the very core of what has, so far, sustained Stumptown: loyalty.

Stumptown’s sale to Peet’s exemplifies an economic phenomenon not confined to the world of craft coffee. Stumptown joins the ranks of a number of popular brands that went from independent to corporate—the Italian San Pellegrino, now owned by the Swiss giant Nestle (along with its main competitor Perrier), the originally Quaker-owned chocolate-bar maker, Cadbury, acquired by the U.S. corporation formerly known as Kraft, and The Body Shop, the cosmetics brand synonymous with ethical sourcing, bought by the French behemoth L’Oreal, to name a few.

Stumptown’s story is typical of an innovative young venture becoming a victim of its own success. Founded in 1999 by Duane Sorenson in his native Oregon, it turned into a national phenomenon (albeit appearing in only a few select cities) and was at the forefront of the small-scale retailers that positioned coffee-making, and coffee-drinking, as a kind of art form. Stumptown’s business model rested on providing an intensely personal experience, designed to build a dedicated following: Baristas were offered quirky benefits that included massages between shifts and, for the many musically inclined staff members, the possibility of having their first albums recorded. Coffee-drinkers, meanwhile, were treated with top-notch beans and unique brews crafted in Stumptown’s “coffee labs.” These were more than just gimmicks—they were integral to the enterprise. Indeed, Sorenson’s expenses were more than justified: His staff was willing to go above and beyond, and his customers willing to shell out for premium treatment.

But these quirky personal touches don’t fit well in the assembly lines of large-scale operations, as the seemingly irrelevant—but actually highly instructive—case of a poverty-reduction program in South Asia would suggest. Microfinance is a lending scheme with a twist: It involves neither contracts nor collateral. Launched as a small experiment in Bangladesh by the economist-entrepreneur Muhammed Yunus and his team of “bicycle bankers,” microfinance, like a high-end cafe, relies on the power of personal relationships. Just as in Sorenson’s case, Yunus’s bold gamble paid off: Because the borrowing was grounded in feelings of loyalty, poor Bangladeshi women paid back their loans much more reliably than borrowers who were considered non-risky by conventional measures.

The model grew into the Nobel-prize-winning Grameen Bank, and microfinance became the most influential single development intervention of recent times, organically amassing a borrower base of 1 billion worldwide. Yet a growth model based on the example of fast-scaling consumer industries—the bid to develop the Starbucks of microfinance, as explicitly attempted by SKS Microfinance in India—was met with a complete breakdown of trust on the part of borrowers and a mass default. The cookie-cutter approach to growth—driven by speed and profit—simply didn’t work in the absence of the personal relationships that characterized the Grameen Bank.

The arithmetic of the “bigger is better” paradigm, or what economists call “economies of scale,” is simple enough. The larger the bushel of coffee beans, the lower the cost per bean. The larger the machine, the more lattes it can spew out. Most of all, scale translates into standardization: the conversion of an unpredictable creative process into a precise and highly economical algorithm of production. All of this means more profits.

But, based on studies of human behavior in places ranging from blood banks to daycare centers, academics now recognize that the calculus is more complex: People act more responsibly in the context of personal relationships that are meaningful to them than in strictly commercial transactions. In fact, loyalty sometimes even trumps economic rationality: going that extra mile to get the perfect cup of coffee, or paying a loan back when the opportunity exists to default. This is what the shift from boutique to mass-manufactured cuts out.

Even as Peet’s plans to treble Stumptown’s presence and make it more widely available at grocery stores, it threatens to make the Stumptown experience increasingly impersonal. But making Stumptown indistinguishable from Starbucks will jeopardize its core constituency, and may even hurt Peet’s bottom line.

Smaller institutions have much to offer—not just sentimentally, but also in terms of pure economics. The idea goes back to the 20th-century British economist E.F. Schumacher’s declaration that “Small is beautiful,” a notion fashionable again in the era of institutions “too big to fail.” Since the logic of scale is more attuned to quantity than quality, workers (whose wages are usually driven down), consumers (who enjoy lower prices, but usually get a worse product) and the landscape of the economy (which shows signs of marked decreases in diversity) all suffer from growth that is too rapid. Size is the conventional metric of economic success, but when stability is pursued as passionately as profit, less may truly be more.

By Antara Haldar on THE ATLANTIC

Behavioral economics upended the idea that humans act solely in their rational self-interest. So why do most undergrads barely learn anything about the field?

In the late 1800s, one of the most enduring fictional characters of all time first appeared on the scene. No, I am not talking about Sherlock Holmes or Oliver Twist, but a less well-known though arguably more influential individual: Homo economicus.

Literally meaning “economic man,” the origins of the term Homo economicus are somewhat obscure—early references can be traced to the Oxford economist C. S. Devas in 1883—but his characteristics have become all too familiar. He is infinitely rational, possessing both unlimited cognitive capacity and access to information, but with the persona of the Marlboro Man: ruggedly self-centered, relentlessly materialistic, and a complete lone ranger. Homo economicus, created to personify the supposedly rational way humans behave in markets, quickly came to dominate economic theory.

But then in the 1970s, the psychologists Daniel Kahneman and Amos Tversky made a big discovery. The academics drew on psychological evidence to show that the actions of human beings deviate from the ironclad rationality of Homo economicus in all sorts of ways: People make systematic errors of judgment, such as being excessively attached to what they own, and yet are also more generous and cooperative than they’re given credit for. These insights led to the founding of a new field, behavioral economics, which became a household name 10 years ago, after Cass Sunstein and Richard Thaler published the best-selling book Nudge and showed how this new understanding of human behavior could have major policy consequences. Last year, Thaler won the Nobel Prize in Economics, and promised to spend the $1.1 million in prize money “as irrationally as possible.”

But despite the fanfare, Homo economicus remains a stubbornly persistent part of the economics curriculum. While it is fashionable for most economics departments to have courses on behavioral economics, the core requirements in economics at many colleges are usually limited to only two substantive courses—one in microeconomics, which looks at how individuals optimize economic decisions, and another in macroeconomics, which focuses on national or regional markets as a whole. Not only is the study of behavioral economics largely optional, but the standard textbooks used by many college students make limited references to behavioral breakthroughs. Hal Varian’s Intermediate Microeconomics devotes only 16 of its 758 pages to behavioral economics, dismissing it as a blip in the grand scheme of things, an “optical illusion” that would disappear “if people took the time to consider choices carefully—applying the measuring stick of dispassionate rationality.” The staple textbook on macroeconomics, written by Gregory Mankiw, gives behavioral approaches even shorter shrift by scarcely mentioning them at all.

Instead, the overwhelming majority of courses that students take in economics are heavily focused on statistics and econometrics. In 2010, the Institute for New Economic Thinking convened a task force to study the undergraduate economics curriculum, following up on a report from 1991. What changed in the intervening years, it found, was “an increase in mathematical and technical sophistication” that was “not sufficient to foster habits of intellectual inquiry.” In other words, Homo economicus is going strong in lecture halls and textbooks across the country.

Economists’ resistance to incorporate the wisdom of behavioral approaches may seem like a frivolous concern confined to the ivory tower, but it has serious consequences. What students are taught in their economics classes can perversely turn models and charts that are meant to approximate reality into aspirational ideals for it. Most economics majors are first introduced to Homo economicus as impressionable college freshmen and internalize its values: Studies show, for instance, that taking economics courses can make people actively more selfish. The consequences are only made more acute by the fact that business, a more preprofessional version of economics, is the single most popular major for college students in the United States—some 40 percent of undergraduates take at least one course in economics. That behavioral economics has been minimized and treated as an aberration by the mainstream has major bearings on how students make sense of markets and the world.

What is so surprising about the hesitancy of economists today to absorb the learnings of behavioral economics is that until the appearance of Homo economicus, invoking psychology in the teaching of economics was standard. At the University of Cambridge, for instance, before a stand-alone department was established in 1903, economics was taught alongside psychology and philosophy. Only after World War II, when the center of gravity of the discipline shifted across the Atlantic, did the rupture became so stark. The dawn of the American era in economics marked a more intense commitment to mathematical analysis, at the exclusion of all else.

This profound change in the economics curriculum has resulted in a discipline that is sterile, tone-deaf, and lacking an emotional pulse—but also one that has proved ineffective in its explanatory and predictive capacities. Economists don’t exactly have a great track record at anticipating the pertinent developments of late: The discipline as a whole was caught off guard by the Great Recession in 2008 and has been late to recognize the skyrocketing rise of inequality. It is even more ill-equipped to deal with looming seismic shifts on the horizon, such as the accelerating effects of climate change or how advances in artificial intelligence will affect workers. Given the greatly amplified role of professional economists at every level of policy making, the extent to which economics is disconnected from reality is becoming more alarming.

Making behavioral economics compulsory isn’t a cure-all for the ills of the economics discipline, but doing so would go a long way in encouraging students to think about building economic models around actual human beings rather than around the caricature that is Homo economicus. If there’s a deeper lesson to come out of the behavioral revolution, it’s that the vagaries of human behavior make it very difficult to model as a pure science, and economists have a lot to learn from other disciplines, including other social sciences and the humanities. This may mean a dose of humility for economists, but it would enrich both the education that their students receive and their prospects of making positive change in the real world.

So because rumors of the demise of Homo economicus have been greatly exaggerated, economics professors today still have the chance to cast aside this antiquated character once and for all.

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