Columnists: Hans Nilsson, Fourfact

Published on: 10 Jul 2014

The economic man – a scary Cyclops or a useful idiot?

There is a spectre, a ghost, that haunts many governments in Europe. It is supposed to be a ‘gentle’ spectre, but it brings paralysis to the governments that are allowing the spectre to exercise more power than justified. They, however, do so since the gentleness of this creature is seducing them. It is seducing since it is supposed that he (yes it is a man) would turn everything right quietly and with no harm. But who is he who has such power?

This spectre is also known as the economic man. He is the guy with invisible hands that guides the economy and steers it to optimality, equilibrium and eventually also happiness for all. Unfortunately some governments believe strongly in this creature even if he has never existed and is a fairy tale that lives only in textbooks in economics.

According to Richard Thaler and Cass Sunstein and their book “Nudge” this economic man “... can think like Albert Einstein, store as much memory as IBM's Big Blue and exercise the willpower of Mahatma Gandhi.” This mythological creature is very rare.

Adam Smith gave birth to the concept of the economic man, and the invisible hand(s), by assuming that when (and if) everyone acted according to their own self-interest the result should be harmony: It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

A Swedish author, Katrine Kielos, has observed that Adam Smith, in spite of the deliveries from the butcher, the brewer and the baker, would still not have a dinner on his table if his mother had not cooked for him. She, however, did so for most of Adam’s life. If she cared for her grown son out of self-interest, benevolence or pure habit is anybody’s guess.

The belief in these fairy tales about invisible hands and people with super-brains are, however, essential for the claims that the European energy and climate policies could do with only one target, that for GHG emissions. With the one target the economy would, assisted by the economic men and the invisible hands, find the true optimum.

Numerous economists have raised doubt in these fairy tale theories during the years, but obviously have not reached to the minds of governments even if they have been recognised with Nobel Prices. Amartya Sen is one with his article on “Rational fools” already 40 years ago, another one is George Akerlof with his work on asymmetric information and a third is Daniel Kahneman who has been very articulate in his book “Thinking fast and slow”. There are many more to be mentioned, Shiller, Stiglitz and Osterman to mention some.

There are, however, too many of the true believers in bedtime stories in the governments around Europe. And their resistance to accept the evidence of the need to also address energy efficiency separately (which becomes obvious when, for example, you read the many eceee summer study papers) put a dead hand on the policymaking. They remain convinced, regardless of the volume of evidence, that the sole solution is the one-eyed Cyclops, the economic man.

The one important role for their approach is in making calculations on the cost-effective potential for efficiency improvements because by assuming everyone acts totally rational, it is possible to theoretically calculate how big the wasting of energy resources (together with many other resources such as water and materials) is.

The economic man actually plays a useful role: not as an actor but as a “useful idiot” when we are planning. But his role should stop there. When deciding upon measures we need a holistic approach and recognize people as they are not idealising their behaviour. We need guidance not assumptions!

PS In the Greek mythology the Cyclops were superheroes and not only one but three! Arges (thunderbolt), Steropes (lightning), and Brontes (thunder). So OK for Cyclops if we employ a sufficient amount. Let me suggest GHGicus, Efficientos and Renewablatus.

Other columns by Hans Nilsson