One of the key features of Homo economicus is an utter disregard for anyone else. Generally, economic models feature actors who choose to maximize their own well-being, be it utility or profit, while ignoring the well-being of others. Such behavior is not required for rationality, but it is often assumed because it makes mathematical models of behavior much simpler. Some of the basic concepts in welfare economics, a study of how economic policies can affect the overall well-being of all actors in an economy, rest upon the assumption of selfish actors. The first fundamental welfare theorem states that under a set of strict conditions, including the condition that all actors in the economy do not consider others in their preferences, a competitive equilibrium is a Pareto optimum. Unless there is interference in the market through taxes or other actions, this result does not hold with actors who are not utterly selfish. In this case, actors in the market who care about the outcomes of others lead to a market equilibrium in which someone could be made better off without making others worse off. If only everyone could be a little more selfish. The first welfare theorem was first proved by Gerard Debreu. Debreu won a Nobel Prize for, among other things, his proof of the first welfare theorem. When Debreu received his prize he was extolled by the press as the man who had proved that free markets get things right. One (possibly apocryphal) story relates that when he was asked to comment on his proof that markets “get it right,” he replied that the number of questionable conditions and caveats necessary to prove that markets are Pareto optimal was so great that he almost wondered if in fact he hadn’t proven that markets almost certainly get things wrong. Economists generally refer to people who are willing to pay to make others better off as altruistic. Altruism is a subclass of other-regarding preferences, also called social preferences, or preferences that take into account the well-being or actions of others. Being altruistic does not imply irrationality. It is certainly possible to have complete and transitive preferences and still care about others. However, many of our theories conveniently assume that people only care about their own outcomes so as to simplify the theory or to make measurement of important outcomes using statistical data more straightforward. In fact, many economists who would not classify themselves as behavioral economists study altruistic behavior and use economic theories that assume some form of altruism. Nonetheless, the assumption of a purely selfish actor is so ubiquitous in economics that behavioral economists have focused substantial resources on determining the extent to which people care about others and how the welfare of others figures into one’s decisions.
Last modified: Wednesday, 1 June 2016, 11:19 PM