January 22, 2009

I recently read Global Capitalism: Its Fall and Rise in the Twentieth Century by Jeffry A. Frieden.  As in many books in this genre the first age of globalization which ended in 1914 receives a great deal of treatment.  This was a period of free movement of capital, goods and labor.  Frieden observes that though there was agitation and organization against the power of international capital, the mobilization by native labor against immigrants was much more vociferous.  The reason for this is quite obvious: immigrant laborers reduced the wages in the unskilled sector on the order of 10-15% in the United States, to as much as 50% in Argentina.  The movement of labor and capital was sensitive to market conditions; if an economy faltered foreign investment would be reallocated, and immigrants streams which shift and reverse migration would ensue.

But this economical treatment often seems to make too great an equivalence between capital and labor.  The world of high finance is fundamentally rooted in abstractions, while other human beings are as concrete as one can get.  Most American who have credit cards don’t have an intuitive understanding of compounding interest (my friend Greg Cochran claims that surveys suggest 5% of Americans understand the power of compounding growth), but all aside from autistics have an intuitive grasp of human dynamics. Economists I’ve known object that there isn’t fundamentally any difference between new technologies making unskilled labor redundant and immigrants who are willing to accept a lower wage for the same task.  But there is a fundamental difference, and that is that we humans view the acts of human agents in a very different manner from acts which are proximately non-human.

I am a rather absentminded person.  If I walk down the street listening to the news on my iPod Shuffle I occasionally run into a tree branch. This causes pain, shock and some initial irritation. On the other hand, if someone hit me as I was walking down the street, the physical inputs might be the same, but the psychological reaction will be fundamentally different.   Evolutionary psychologists and cognitive scientists have long argued that humans have different domain-specific competencies for various categories of phenomena (e.g., folk physics, folk psychology and folk biology).  In plain English, we don’t model human relations as we model stationary rocks.  The exceptions to this are autistic individuals, who do model humans as they model rocks.  The likely existence of domain-specific competencies which are implicit and reflexive naturally results in large deviations from the rational actor models of human behavior.  It is no wonder that where cognitive psychology ends and behavioral economics begins has more to do with subject matter than methodology.

Many economists rightly point out that assumptions of rationality are first-order approximations, deviations will naturally exist. But what if the terms here are inverted?  What if the deviations are the human norm, while rationality is the atypical preserve of individuals gifted with natural general intelligence and a disinclination to follow their first impulse?  In The Myth of the Rational Voter Bryan Caplan cites numerous studies which suggest that those with higher IQs are much closer to the rational actor than humans with normal endowments.

Despite the fact that the average human has strong cognitive biases and is only modestly gifted with the ability to conceive of the operation of compounding interest, human civilization does exist.  We do create complex and creative societies.  The sociality of our species is a conundrum to evolutionary biologists; standard bottom-up theories such as reciprocal altruism and kin selection do not seem to scale up appropriately. With options running out some are now looking to group-level dynamics as the possible explanation for why human societies can scale up.  The possibility of group-level dynamics being tied to our innate competencies (in fact, likely various social intelligences were shaped by a co-evolutionary processes) means that viewing labor, which after all refers to the economic output of human beings, as an easily reducible unit in the international economic order might need to some rethinking.


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