The unfairness effect on ‘Homo economicus’
Economic theories are based on certain assumptions — one of them is that humans act in self-interest. Dr. Falk’s work suggest that this is not entirely true — “fairness” has a great deal of effect on human decision making. From The Globe and Mail Metro, April 20, 2012:
Does fairness matter? As France prepares to elect a president this spring and the United States gets ready to elect a president in the autumn, that old philosopher’s chestnut is gaining tremendous real-time political relevance.
Economics, by contrast, hasn’t traditionally been much concerned with fairness. Instead, economists have based their analysis on “Homo economicus,” a model human being who is perfectly rational and perfectly guided by self-interest.
The financial crisis of 2008 made it hard to believe in a world of perfectly rational actors, even when they earn million-dollar salaries and have advanced degrees. Now, a growing body of research is challenging the second part of the definition of Homo economicus – that he is guided purely by self-interest.
The alternative view was advanced by Armin Falk, a Bonn University economist, at a recent economics conference in Berlin that was organized by the Institute for New Economic Thinking. It emphasizes the importance of fairness and trust to human behaviour. This approach takes as its starting point the idea that we are social animals, driven powerfully by how we fit into our community.
In one experiment, Dr. Falk and Ernst Fehr of the University of Zurich investigated an issue that should be of great interest to the world’s human resources departments: Does our perception of fairness influence how hard we work? Their answer is yes – workers who are underpaid don’t work as hard.
The two professors’ conclusion was based on the responses of experimental subjects. In his Berlin talk, Dr. Falk also cited an American real-world example that points to the same conclusion. A bitter fight between workers and management at Bridgestone/firestone’s plant in Decatur, Ill., in the mid-1990s, including a long strike and the hiring of scabs, coincided with the production of poorer-quality tires.
“Looking before and after the strike and across plants, we find that labour strife at the Decatur plant closely coincided with lower product quality,” reports a paper on the subject by Alan Krueger, a Princeton economist who is now the head of the U.S. President’s Council of Economic Advisers, and Alexandre Mas, also of Princeton. “Monthly data suggest that defects were particularly high around the time concessions were demanded and when large numbers of replacement workers and returning strikers worked side by side.”
Workers who feel they are being treated badly aren’t just unproductive; they can be downright dangerous.
An obvious response to this finding if you are in the H.R. department, particularly if your colleagues in finance are giving you a hard time, is to find ways to control your employees more strictly.
But another study by Dr. Falk, with Michael Kosfeld of Goethe University Frankfurt, suggests that keeping workers on a tight rein can be counterproductive. When our bosses closely monitor our work and restrict our opportunities to slack off, we feel we are not trusted. The counterintuitive result is that the more strictly we are controlled, the less hard we work. Another triumph for the social animal over Homo economicus.
Some of Dr. Falk’s most recent work takes the question of fairness into the medical laboratory.
He and a team of colleagues asked what the physical impact of unfair pay was, as measured by our heart. Experimental subjects who felt they were being unfairly paid showed higher heart rate variability, an indicator of stress that has been shown to predict heart disease.
Faulty tires and failing hearts are the grim consequences of unfairness suggested by Dr. Falk’s talk.
But the new vision he and like-minded researchers are developing of how human beings operate in the economy is actually rather uplifting.
We aren’t driven solely by selfinterest; fairness and decency matter, too. Kindness and justice turn out to be useful concepts not just at the pulpit or among philosophers, but also as essential tools in the workplace.
Many employers already know this intuitively. Smart ones will start to apply these findings more explicitly, too.
The next step is to adopt these discoveries about the social animal to our thinking about the broader political economy. In one way or another, this year’s pivotal elections will all be about the economy, stupid.
But a sophisticated understanding of how the economy really works means thinking not just about gross domestic product, but about fairness and autonomy, too.
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