Constructing a More Scientific Economics

This chapter presents a personal, subjective, and hopefully accurate description of my role and John Tomer’s role in the evolution of behavioral economics and in SABE’s (Society for the Advancement of Behavioral Economics) birth and history. It is based in part on material provided by Ben Gilad. It includes some personal recollections of John Tomer, as he communicated them to me, published here for the first time.

Tomer is concerned with an economy where more people are becoming diabetic, obese, depressed, manipulated, and confused. Tomer suspects that both the invisible hand and the visible hand are responsible for these socioeconomic dysfunctions. He argues that a new hand, “the humanistic hand,” can promote both well-being and economy growth. I propose the “heart-head model” of the humanistic hand. Both the warm heart and the cool head are resources for functioning.

In the time needed to read this chapter, using institutions of corporate finance the wealthiest one percent of people will have acquired more wealth capital earnings than most people will earn in their lifetimes no matter how hard, smart, or long they work. Based on a principle of fuller employment and per-capita growth not found in widely recognized economic analysis, this chapter explains how the same institutions could voluntarily operate more profitably (without redistribution) if all people were included in the competitive process of capital acquisition with capital earnings: A broader distribution of capital acquisition with future capital earnings provides the expectation of more broadly distributed discretionary capital income in future years (to people with a higher propensity to consume) and therefore greater incentive to employ more labor and capital in earlier years.

This chapter examines John Tomer’s contributions to our understanding of the concept of human capital. Tomer criticized the standard mainstream view of the concept as narrowly focused on education and training and as seeing investments in human capital as having “an individual, cognitive, and machine-like nature.” A broader concept included attention to the people’s noncognitive development and employed both social capital and personal capital concepts. This produces a more expansive view of human development, allows for a humanistic psychological perspective, and supports a multi-dimensional, Maslovian understanding of the hierarchy of human needs. Tomer framed his policy thinking regarding investments in human capital in terms of the goal of helping people become “smart” persons. He recognized that a barrier to accomplishing this is high levels of economic inequality. The chapter thus goes on to discuss how socially stratified societies generate economic inequality in regard to human capital investments, and how thinking in terms of people’s capabilities can help us advance progressive economic and social policies agendas.

John Tomer’s book The Human Firm sought to extend the neoclassical model of the firm by incorporating what he called “the firm’s human dimension.” Among other factors, Tomer emphasized the importance of broadening the human capital concept to obtain a more robust understanding of the firm. Tomer focused much of his life’s work on fleshing out the role that intangible types of human capital can play because he viewed economics as falling short in this regard. Here, we review the work of John Tomer and other economists with the goal of identifying how extending the neoclassical model of the firm has provided a better understanding of how firms work, how they affect the individuals who work in them, and how they affect society as a whole.

I model how community embeddedness and consumer voice can incentivize firms to be more ethical and socially responsible. Building on x-efficiency theory, I also make the case that being more ethical and socially responsible does not imply higher average costs and lower profits as assumed by conventional economic theory. Moreover, being more ethical or socially responsible need not improve profits or reduce average costs. There is no theoretical reason for self-interested firm decision-makers to be more ethical or socially responsible. Therefore, firms that are embedded in their community and where consumers have effective voice should be more ethical and socially responsible. In this environment, such behaviour makes the firm more competitive. Fear of government intervention is another reason for changes in firm behaviour.

Much of Tomer’s publications and research was related to the theory of the firm and its empirical foundations and very much influenced by the writings of Harvey Leibenstein, a pioneer in behavioral economics and behavioral theories of the firm. At the same time, Tomer’s approach to theories of the firm and his analyses is not consistent, on many points, with Leibenstein’s writings. This chapter critically discusses both the consistencies and the inconsistencies between Tomer’s and Leibenstein’s conceptualization of the firm.

This chapter provides an overview of the behavioral economics and the psychology of consumer decision-making regarding healthy and sustainable food. This is in the context of targets for sustainable levels of food consumption set by policy makers having not been met even though there is consensus about its detrimental environmental effects. Alternative ways of changing food diets in more healthy and sustainable directions have been based on behavioral and psychological insights in consumer decision-making. Such insights include knowledge about the effects of social norms, discounting of delayed consequences, neglect of sustainability and health information, and nudging. This has contributed to less traditional types of policy making regarding food consumption, for example, by using social influence, changing defaults of consumer choice, and emotional appeals.

Building on Tomer’s insights on the determinants of unhealthy eating and obesity, we extend the important price-based model of “rational” consumer choice with healthy living determinants such as food and exercise. We argue that variables such as the quality of information, information literacy, access to healthy foods, and safe and affordable space for exercise, the quality of exercise provision are key determinants of healthy living and, therefore, of the extent to which individuals are obese or overweight. Empirically, critical to reducing the extent of obesity to reducing consumption and/or adequate physical activity. We argue, contrary to Tomer, that as opposed to nudging consumers into behaving in particular a fashion to reduce obesity, it is best to improve individuals’ decision-making environments and capabilities.

Drawing on insights from cognitive psychology, sociology, and neuroscience John Tomer advanced the idea that the relationship between a youth and their parents is the central determinant of the level of skills a person acquires when young and hence their economic status later in life. This view challenges the conventional economic notion attributed to Nobel Prize winning economists Gary Becker and James Heckman that poor parenting—providing children with too little parental time and resources—is primarily responsible for low earnings as an adult. This chapter illuminates John’s perspective that the parent-child relationship—not the amount of time parents spend with their children—plays a fundamental role in the accumulation of a wide range of socioemotional skills during adolescent that subsequently shape life.

In the early 1960s, Becker and Mincer placed households and what they produce at the center of economic analyses dealing with consumption, labor markets, household decisions regarding health, children, and marriage. This school of thought was labeled the New Home Economics (NHE). This chapter provides an assessment of the NHE. Our first contribution is defining the NHE to help determine which other researchers can be considered as being part of the NHE. Second, we offer an assessment of the NHE’s success based on five criteria: awards to its participants, integration of ideas into mainstream economics, NBER’s inclusion of new NHE-led applications of economic investigation, growth of new organizations promoting NHE-related research, and the academic success of early students of Becker and Mincer specializing in NHE.

The impact of carbon dioxide generated by fossil fuels on global warming has been known for 164 years, and the mean annual temperature of the Earth has been rising at least since 1880. Why then has the academic community been unable to translate its consensus on the climate crisis into effective immediate political action? Why have political systems nearly everywhere been unable to cross the Valley of Death between scientific evidence and effective public policy regarding greenhouse gases, climate change, and other social issues? Specifically, why have economists proven so ineffective in this domain? I argue that this is related to the rejection of the behavioral approach of Marshall in favor of the sterile mathematics of Walras. Behavioral economics can be a magic bullet.

Behavioral economics (BE) assumes that what holds for average individuals provides good evidence for all entities. In truth, decision-making is often explained by underlying ideas and is manifested by actual behavior, that of organizations (including non-profits), as well as by that of individuals and enterprises. BE’s guidance should be not only how to avoid poor choices (as at present), but how to make decisions that enable individuals and enterprises to rise to the top, including those who are initial outliers. This chapter summarizes the heuristics and biases uncovered by economists and psychologists in their empirical work on decision-making and offers alternatives for determining the behavior of enterprise outliers and of organizations, including non-profits, that are successful and rise to the top.

Neoliberal plans advocated by Chicago School Libertarian Economics call for moving to ever more private property to facilitate maximizing self-interest through water marketing. The unfounded claim, in both an empirical and ethical sense, is that economic efficiency cannot be served by any other approach. Both Buddhist and Metaeconomics point to the dysfunction of this approach. True economic efficiency arises, instead, from pursuing a balanced self&other-interest, which Adam Smith made clear involved the sentiments, that which people could go along with. All three tragedies—commons, anticommons, and excessive greed—can be avoided and efficiency achieved only by finding ways for other people to go along with that which is evolving in a water market. Balance must be achieved in the self&other-interest, market&government in the water market.