Irrational Humanity.

It may be a product of overindulgence in my favourite pastime of reflection, but I sense these days that people seem to respond less to situations in a manner one would expect. In doing some reading for last week’s article, the thought struck me that perhaps human beings are not as rational as we think. I hesitate to use the term “irrational” because this implies a degree of mental instability, but at times it seems to border on that.

I have been struggling for some time to employ part time help from a large pool of unemployed in the area. After months of experimentation with better than average pay and amenable working conditions I have still not found the formula to counter a widely followed custom here where people work for a few weeks, perhaps even a month or so, and then take an extended, unannounced holiday.

The example is perhaps trivial and anecdotal, but it serves to illustrate the millions upon millions of transactional relationships that make up the global economy where, at the core, lies our understanding of each other and our definition of human nature. The conundrum is whether the behaviour itself is irrational or whether the expectation of a different behaviour is irrational. It should not be a surprise that very often our expectations of the other based on our understanding of human nature differs from the outcome. At the time of writing there were nearly 7-billion definitions of human nature.

The real question is how predictable are human beings? This is not an academic question. It has been the most important component of economics and social structures since the earliest days and strongly informed the writings of amongst many others, Adam Smith who is credited with being the father of Capitalism. Despite his intuitive genius and humanist motive, Smith arguably knew far less about human nature than we do today. More importantly, John Muth’s development in the 1960’s of the theory of rational expectations created the most important driver in economic modelling, which in turn shapes policies, systems, structures and measurements which affect our daily lives. Take away rational expectations and policy loses its grip while systems lose their efficacy.

Yet, it has become increasingly clear that we have only scratched on the surface in our understanding of human beings and of humanity itself. When we get it wrong, it can have some disastrous consequences. The case of Alan Greenspan deserves repeating. There are many, including a recent Federal commission report that put the blame for the 2008 financial meltdown squarely on his shoulders as Chairman of the American Federal Reserve. Time Magazine ranked him third amongst 25 people most to blame for the crisis. Most agree in retrospect that he kept interest rates too low and failed to regulate derivatives and excesses in the financial markets. This is all old hat by now, but the lasting legacy of that time and perhaps of Greenspan himself is the danger of preconceived beliefs about human responses. By his own admission, the flaw in Greenspan’s thinking was that “financial institutions didn't protect shareholders and investments as well as I expected”.

And perhaps more importantly: ``we cannot expect perfection in any area where forecasting is required. We have to do our best but not expect infallibility or omniscience.''

One can understand Greenspan’s frustration. It was natural to assume that given freedom to act in the interests of their investors financial institutions would follow the Buffett philosophy on long term sustainability. It is also too simplistic to blame it all on unbridled greed – some would argue that a measure of greed is an essential component of a Capitalist economy. As a product of the age of deprivation, Greenspan shares with many of that era a belief in prudence, modesty and a moral compass.

The problem is much deeper than greed: there has been an understandable and fundamental shift in human behaviour. The pace of life is so much faster today than it was in the days of my youth or even early adulthood. Despite greater prosperity, we have become more agitated and insecure. Horizons are shorter, so out the window go patience and prudence, making way for immediate self gratification and the quest for a “quick buck”. We don’t have to look much further than companies where reporting cycles and shareholder expectations have increasingly been focussed on short term profitability at the expense of long term sustainability. King III, sustainability reporting and the just announced “integrated reporting” are responses to that. They seem to have negligible effect so far.

It is also easier today to give effect to less rational consumption and acquisition. On line shopping, more seductive and broader advertising, quick and easy money transfers and easier credit, all create the conditions for greater impulse buying and quicker responses. I can remember a time when you needed a 25% deposit and a 36 month repayment period to buy a car. This automatically reduced an impulse buy, giving you time to move from a Porsche fantasy to a Volkswagen reality before committing yourself to a purchase.

The same goes for investments. The quick buck syndrome is the breeding ground for schemers and fraudsters, but even on a legitimate level it is easy to by-pass solid expert advice and to follow an irrational herd via on line trading and half baked, homespun networked views. One could argue that these are desirable features of a modern economy, but one could also argue that given the human behaviour it facilitates, it’s a bit like having well oiled wheels on a runaway truck.

The gap between expectations and reality is much wider than decades ago. Expectations may have been dampened somewhat by the meltdown but there are still symptoms of “irrational exuberance”. This makes them unpredictable and if you multiply them by the vast increase in the number of people, each with their own expectations and aspirations in a world where they can more easily express them, then you are dealing with a data base that no known model can capture for sensible and reliable assumptions.

Add to the mix, random events such as floods, earthquakes, strikes and social unrest, all of which have their own impact on the real economy as well as on human expectations, then current models are rendered more inaccurate and suspect.

The exciting thing is that this is being recognised and work is being done to develop a much more comprehensive and all encompassing model.

But in the meantime, the consistency we seek does not lie in computer models, measurements, structures and systems, but in a return to universal values that make us more trustworthy and reliable as human beings. They include honesty, fairness, care for each other, generosity and integrity.

Unfortunately, these are not things you can legislate for. You cannot force people to be generous – that’s taking not giving. You also cannot coerce compassion. That’s a contradiction in terms.

The Broken Link.

If the title sounds familiar, it is because I borrowed it from the pioneering and award winning documentary produced for Springbok Radio in the 70’s by broadcast doyen, the late Bryan Chilvers. The programme covered the generation rift that had developed in society at that time, demonstrating again the old cliché that “the more things change, the more they stay the same.”

One can’t help thinking, though, that this time there are many more broken links than one between generations, which is endlessly repetitive in any case. There is some inkling of this in an unassuming French “book” Indignez vous (Cry Out) whose 13 pages of text have smashed all publishing records in France, selling more than 600 000 copies in the first 3 months. It has been written by 93 year old French resistance hero and activist, Stephane Hessel who urges people to recapture the spirit of war time resistance against the Nazi’s to challenge what he claims is today’s market tyranny. Against the background of popular protests against austerity in much of Europe one can’t avoid seeing Hessel’s pamphlet as striking a chord of popular discontent in many parts of the world.

The broken links are many and profound.

The link is broken between population growth and what the planet can sustain. In turn this has broken other links such as that between consumption driven prosperity and sustainable resources; between growth and bio-diversity; and between human activity and the balance in nature.

The link is broken between prosperity and contentment. Despite an 8-fold increase in prosperity in the last 50 or so years, there has been little increase in human contentment as argued by Richard Easterlin. This may be because of our difficulty to determine what makes us happy as individuals, or even the definition and measurement of contentment itself. But economies clearly fail in an important respect if they do not enhance social contentment, whether perceived or not.

The link is broken between economic systems and equitable wealth distribution. As the latest World Economic Forum report has recognised, it is no longer an ideological or emotive issue when it starts to ferment social disquiet. Classical theorists will find it difficult to present rational arguments to an irrational mob, whether at the polls or in the streets. The truth is that there is no solid market argument for the huge income disparities. Failing to recognise that envy based on comparisons is the main source of human discontent is not much different from Marie-Antoinette’s famous “let them eat cake” remark.

The link is broken between expectations and reality. This deadly economic virus is still being nurtured. An example is the promise in the New Growth Path to create 5 million jobs in the next 10 years. However laudable the intent and perhaps even the plan itself, pegging a “big, hairy, audacious goal” to something so exposed to market uncertainties is needlessly flirting with social discontent. Another is the let down recent matriculants must feel when 9 out of 10 of them can’t find jobs within a year or more.

The protests in Europe are a reflection of unrealistic expectations. But it is more than the let down from the “good years” which in turn were based on another broken link: that between prosperity and tangible wealth creation or the froth generated in a cappuccino economy. It is clearly based on an expectation that governments can do something about it: like borrowing to roll over debt – which most of them have done. The expectation that there won’t be a future price to pay in greater austerity or inflation is unrealistic. It is also a tab that we may have to pick up sooner than we think.

This shows that the link between popular politics and sound economic policies is also broken. Some may argue that it has never existed and is impossible. We have seen time and again that the popular thing is not always the right thing. We have come to understand democracy as being about elections rather than about governance, transparency and accountability and the ability to make the right rather than the popular decision during tenure, even with a well informed electorate.

The link is broken between economic models and reality. I reflected with interest on the usual medley of annual economic reviews and forecasts this past month or so. They range from cautiously optimistic to a touch of euphoria about the year ahead, with one or two even declaring the end of the recession. Apart from an occasional reference to “Black Swans” most seem to have been written out of the context of the “scary world” that Felicity Duncan so aptly extrapolated from the WEF report.

This is understandable. According to the Wall Street Journal, economic models simply have not come to grips with that erratic, unpredictable, complex and most important component of all – human nature. It’s a component that simply cannot be reduced to a mathematical formula and it has made attempts to model the economic future inaccurate at best and futile at worst. Very few of us understand ourselves, let alone the nature of others. A growing realisation of this defect is bound to challenge our understanding of all economic theory. It will also challenge our stance on systems, measurements, policies and ideologies all of which are based on preconceived ideas of human responses. This need not imply rejecting proven best practices, but a more comprehensive understanding of our world and human responses will help us avoid unintended consequences: such as labour laws that destroy jobs, social grants that encourage layabouts, and interest rate cuts that fail to stimulate job creation.

Let us join the optimists who proclaim that with a bit of luck, the absence of major sovereign debt defaults, fewer floods, tsunamis, earthquakes and other displays of nature’s wrath, we will “muddle” though the next decade or so. But in the meantime, this is also a time to “let a thousand flowers bloom” as Robert Johnson of the Institute for New Economic Thinking put it. Such a process will be infinitely enhanced by extending economic modelling to seriously include other disciplines such as psychology, the social sciences, science itself, religion, and medicine - indeed all branches of knowledge. The existing firewalls between these disciplines have to be dismantled completely.

Such a vastly extended model will come closer to the truth: that economics is much more complex than what we have thought, perhaps not in basic principles, but certainly in the human dynamic that drives it. Yet it is simply unthinkable than human kind with its superior intellect, vast accumulation of knowledge and the information revolution, cannot find solutions.

It is not too outlandish to say that economics as we know it, is itself broken and we cannot rebuild new structures on broken foundations. Returning to old ideological paradigms and assumptions will not do. We should be pursuing new holy grails rather than protecting old holy cows.

The more things change, the more we have to change with them. Einstein’s definition of insanity is “doing the same thing again and again and expecting different results”.

But there is one constant: it is the one that made us the greatest species on the planet - the capacity for compassion.