Want to be part of an economic experiment?

As you are probably aware, most subjects in experiments get paid for their time and trouble, but this is an economic experiment. So, in keeping with the way economics works, we figure that you will derive so much benefit and pleasure for your participation in this experiment that you will have to pay to participate.

And the even cooler thing is, you already have participated and you have paid and will be paying for a very long time for your participation. What? You didn’t realize that you were participating? You didn’t sign any consent form? Not a problem, your government signed on your behalf.

Here are two examples of recent economic experiments based on free market theory in which you have participated. The basic premise of these two experiments is that regulations harm the public because they interfere with the free market. And since the free market knows best, we all are less well off because of those regulations.

So here is the result of two experiments in which you have participated.

First, let’s consider the New York Times story from Sunday – Road Stirs Up Debate, Even on Its Name.

The Times story describes the building of Highway I-99, a roughly north south connector between I-76 and I-80. This road came into being where it was and how it was built as a result of the efforts of Rep. Bud Shuster.

Among the anomalous things in the building of that road was Shuster’s forbidding compliance with environmental impact studies. The result was that the route Shuster picked went through highly toxic pyritic rock, and this was not discovered until well into the building process. The rock was so toxic that all construction in that area had to stop while the size of the problem was assessed and a solution found. All this added huge costs

Whatever one calls it, the final, 18-mile section of Interstate 99 that opened here last month in Central Pennsylvania — connecting Interstate 80 and the Pennsylvania Turnpike, Interstate 76, for the first time — was not built quickly, and it was not cheap.

At $631 million, including $83 million to clean up toxic pyritic rock that was the result of a 35-million-year-old meteor impact, this section of I-99 was nearly twice as expensive as anticipated and took at least four years longer than expected to finish.

So there you have experiment number 1. And thank you very much, US taxpayer for picking up the tab for this economic experiment.

Second, let’s consider the economic experiment that removed all sorts of regulations on markets and financial institutions and that removed oversight. I figure I don’t have to explain the details of this experiment. Unless you’ve been living in a cave or the Oval Office, you are aware of how this one has gone and have a sense of at least some of the costs . . . to date.

Assessing these experiments.

Now, let me come clean. It is true that you and I have been participants in number of economic experiments in recent years. These two are just the most dramatic and with results that are easy to understand. However, there have been many more that have involved removing oversight and regulations.

Deep Harm has discussed a number of them. For example, remember the constant stream of food and drug problems in recent years. All the result of lack of oversight and regulation. Some with deadly results. Those happened because the regulators were taken off the job by privatization of their duties or just plain old “benign” neglect. Though, perhaps it was malign neglect, but neglect nonetheless. And justified by the canard that the unregulated free market provides the best results.

What we have learned from these natural experiments is that regulations are helpful in safeguarding us – something markets are uninterested in- and they do so, in part, by providing needed information so we can protect ourselves. This is an interesting point, because market theory tells us you need complete information to have a functioning market. By removing regulations, the free marketeers took away something that supports a functioning market.

Now, obviously, I lied when I told you that we were going to test these theories. The truth is that the proponents of free markets never really test these big theories. Rather, they treat them as if they were religious dogma, something that need not be subjected to testing. The inadvisability of doing so can be found by looking at how classical economic theory developed. This article from Scientific American provides an overview:

The 19th-century creators of neoclassical economics—the theory that now serves as the basis for coordinating activities in the global market system—are credited with transforming their field into a scientific discipline. But what is not widely known is that these now legendary economists—William Stanley Jevons, Léon Walras, Maria Edgeworth and Vilfredo Pareto—developed their theories by adapting equations from 19th-century physics that eventually became obsolete. Unfortunately, it is clear that neoclassical economics has also become outdated. The theory is based on unscientific assumptions that are hindering the implementation of viable economic solutions for global warming and other menacing environmental problems.

The physical theory that the creators of neoclassical economics used as a template was conceived in response to the inability of Newtonian physics to account for the phenomena of heat, light and electricity. In 1847 German physicist Hermann von Helmholtz formulated the conservation of energy principle and postulated the existence of a field of conserved energy that fills all space and unifies these phenomena. Later in the century James Maxwell, Ludwig Boltzmann and other physicists devised better explanations for electromagnetism and thermodynamics, but in the meantime, the economists had borrowed and altered Helmholtz’s equations.

The strategy the economists used was as simple as it was absurd—they substituted economic variables for physical ones. Utility (a measure of economic well-being) took the place of energy; the sum of utility and expenditure replaced potential and kinetic energy. A number of well-known mathematicians and physicists told the economists that there was absolutely no basis for making these substitutions. But the economists ignored such criticisms and proceeded to claim that they had transformed their field of study into a rigorously mathematical scientific discipline.

The article goes on to describe some of the demonstrably false assumptions that are the underpinnings of classical economics.

But, before leaving this subject, you should be aware that there have been economic tests – actual scientific tests – that have found that the basic foundations for market theory, in particular self-interest, are false. Rather, study after study has shown that people (and even our primate relatives) value cooperation. When cooperation does not occur, people will punish the non-cooperator. It’s a bit hard to give cites to the study reports themselves, since they tend to be written up in subscription only journals.

One paper that is available is a meta-study.

Experimental behavioral scientists have found consistent deviations from the predictions of the canonical model of self-interest in over a hundred experiments from around the world. Prior research cannot determine whether this uniformity results from universal patterns of behavior, or from the limited cultural variation among the university students subject pools used in virtually all prior experimental work. To address the above questions, we undertook a cross-cultural study of behavior in Ultimatum, Public Goods, and Dictator Games in fifteen small-scale societies exhibiting a wide variety of economic and cultural conditions.

We found, first, that the canonical selfishness-based model fails in all of the societies studied. Second, there is more behavioral variability than had been found in previous research. Third, group-level differences in economic organization and the structure of social interactions explain a substantial portion of the behavioral variation across societies: the higher the degree of market integration and the higher the payoffs to cooperation in everyday life, the greater the level of prosociality expressed in experimental games. Fourth, individual-level economic and demographic variables do not explain game behavior, either within or across groups. Fifth, in many cases experimental play appears to reflect the common interactional patterns of everyday life.

That is quite a long paper. So here are some shorter summaries of what we have learned from the many economic experiments done so far.

A summary describing some of the problems with current studies is here.

And a not bad write up is in this Australian newspaper.

By the way, one interesting development is altruistic economics.

So, to sum up, you have been part of a grand economic experiment, many actually, that have shown classical economic theories to have been falsified. Now go on and pick up the pieces. And let’s all try to remember the results of these grand experiments for at least a few decades.

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