Friday, May 29, 2009

A look at fundamental economic assumptions

For the most part, economic education teaches students to understand society by assuming that agents rationally pursue their self-interest. For economists, identifying the the benefits and costs associated with particular decisions is all that's really required to understand why people make decisions (and to figure out how to change them). For along time, most economists believed that individual material interest dominated benefit-cost calculation, increasingly, though, economists have been forced to recognize that social concerns also affect individual calculations (e.g., people will frequently not pursue their own material self-interest if they must take unfairly from others -- particularly others they know).

This article provides a nice summary of some of the experiments in behavioral economics that have helped move social considerations closer to the forefront. The first several paragraphs even directly deal with something we discussed recently -- a union deciding between wages and employment:

The City of Yonkers, New York, wound up in a distressing predicament early this year. The municipal budget was running a deficit and the economic crisis was sorely aggravating the problem. Layoffs were needed and among the casualties were six firefighters, including, most regrettably, a young man who’d recently rescued several children from a burning apartment building. The job cuts were due to go into effect the first week of January.

But then something remarkable happened. The men and women of the Yonkers Fire Department offered to work days free for six months so the city could save money and their colleagues could save their jobs. The deal was approved by 75 percent of firefighters and the layoffs were avoided. “Everyone is aware of what is going on with the economy,” explains Patrick Brady, president of the local firefighter’s union. “We banded together and voted to save our brethren.”

This link includes several other bits on behavioral economics that you may want to check out.

I think this is a classic example of when people think outside of what is normally considered to be rational thought (i.e. whatever it takes to keep a job) and have decided that they would make their own sacrifices for the betterment of their company. The fact that these firefighters elected to work days for free so that there would be no layoffs makes me glad to be American, but at the same time it makes me wonder if people at my own work would be willing to make such sacrifices. Economically, it does make sense as the costs of running the fire department are only shifted across the remaining workers and not eliminated (i.e. fixed costs per worker actually increase). By working days for free they keep morale up, keep synergy alive, and keep friends/coworkers from being on the streets. Way to go!
It made me happy to read that there are still good selfless civilians out there willing to work at no cost, share jobs, reduce their wages/benefits, chose to opt out of bonuses and incentives in order to help others maintain their jobs. This article made me think about if my company had to layoff people, would I (or my coworkers) take a pay cut in order for other fellow employees to keep their job. To be honest it was very difficult for me to answer this question. I would like to believe that I would. However, if I heard there were going to be layoffs and I could be one to be laid off than I would most likely take a pay decrease, work less hours in order for everyone else to continue to be employed. So thinking about the article, did the people that chose to work less hours and took a pay decrease know they were going to keep their jobs? By making these decision were they acting in their own self interest or in the interest of others? That is, taking a pay cut and ensuring they would keep their jobs and wouldn't be the one to let go. Now the question is, Is there no good deed without self interest?
I wonder where religion fits in with the world of behavioral economics? The man that stands in front of the EMU every day holding religious signs comes to mind...Is he doing this for his own benefit( the belief that he must do this in order to help secure his fate in the afterlife) or for the benefit of others (so that they too can go to heaven) ? Clearly there is no monetary benefit from doing this. What about those that dedicate themselves to the degree of a Buddhist Monk ,Catholic Priest or Muslim Shiekh? Then there's the suicide bombers and terrorist groups of the world? What are their incentives? I am not going to pretend to have the answers to this, but I do find this topic interesting,
I think this is an interesting post to read. The firefighters are impressive. Now a day, the economic is getting worse. Many big firms are facing bankruptcy, and people are suffering from unemployment. If workers are willing to sacrifice, we can eliminate many laid off, bankruptcy, etc. But without the pay, can people support their life? (Because they have family, fixed spending and such) Many questions popping out from my mind, however, the firefighter’s case, finally it is good news out of all the bad news. :)
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I think this is an interesting post to read. The firefighters are impressive. Now a day, the economic is getting worse. Many big firms are facing bankruptcy, and people are suffering from unemployment. If workers are willing to sacrifice, we can eliminate many laid off, bankruptcy, etc. But without the pay, can people support their life? (Because they have family, fixed spending and such) Many questions popping out from my mind, however, the firefighter’s case, finally it is good news out of all the bad news. :)
According to the article, for the past 50 years, economic policy has been poisoned by the cynical premise that people are innately selfish and materialistic. This is what has been taught in economics classes; this is what has informed government decisions such as bank deregulation; and this is what has spawned the Wall Street culture of “greed is good.” But a growing body of experimental work by behavioral economists proves altruism not only exists but is one of our primary motivations; even in financial affairs. I believe people are motivated by morality and by ethics, and its good thing.
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I feel this was spectacular news, in spite of everything going on with the economy, this is just a great reminder or how there are good people who exist in this world who want the best for the person standing next to them. It makes me wonder how the CEO's of these major companies who are cutting jobs would feel to read this article. I would like to hear of a story where the top management would be willing to take large cuts out of their salaries to support the lower end of their companies and all the hard working people there trying to make a living.
I enjoyed reading this story, as it is always nice to see such acts of kindness during such gloomy times. And it is interesting how people go against what we would say to be their selfish interests and make sacrifices for the good of others.
This is a personal rant of mine, but I do not like firefighter unions. Think about it, police officers and firefighters do roughly the same job: protect the public, respond to accidents, etc. However, cops in their spare time on the clock, uphold the law. Firefighters work out and sleep. Yet firefighters get paid drastically more. The city of Vallejo went bankrupt because there were several firefighters lower than fire chief that were making $200,000+! It also bothers me that in my hometown of Davis, CA, firefighters are paid more than firefighters in West Sacramento even though in West Sac there are numerous industrial warehouses that could cause nasty chemical fires while Davis rarely has any fires or severe accidents.
No income for firefighters!!! Scarfices can make their company better off. Right now, the economic is getting worse and worse. Many firms are facing bankrupt. If everyone can scarifice themselves, the economic can be much better. However, no people can live without income. Even though the firefighter's case is good. Seems like it;s not ok in the real world.
This article, similiar to Freakanomics, dares to challenge the the basis of american capitalism by introducing a human element often times overlooked by economic models: altruism. In the face of economic recession, it's refreshing to see acts of selflessness to preserve jobs. Although a picture perfect illustration of how friendship and comradery trumps material gain, I would like to read the same article but instead of firefighters, read about CEOs' forfeitting lavish salaries to preserve jobs. Avarice will always be the driving force in capitalism, but future economic models must take into consideration that "people are more concerned about equality than financial gain."
I feel that, utility isn't a function of consumption, but rather a function of social interaction, and that consumption is a coefficient on that, so it takes no stretch of the imagination to understand why individuals would choose to act in what looks like a selfless way, but really they're just maximizing the benefit they receive from social interaction by not singling themselves out in a negative way (i.e. i get paid a lot more than you do to do the same thing).
I truly thing it is a very interesting post which can makes people think deep. The international economic is at a very bad situation. Nowadays, it is very hard to find a job even if you finished grad school in my country. It makes me worry from this huge unemployment. I do believe it might be a good solution if labors are willing to receive less than their expectation. Nevertheless, due to the inflation and bad economic, it is hard to survive with low pay or even no pay. Hence, the fire fighter makes me feel warm that there are still good people in our society.
It is nice to read a article where people are making sacrifices to help other co workers. It is a good example of people doing things for the better of the community. I do wish that the profession of this article was not firefighters, rather another profession where the risks (death) and rewards (savings lives) were slightly less important.
This discussion breaks down traditional economic thought in a refreshing manner. Economists describe the world in a "rational" manner which tends to be very absolutist. Upon reflection however, most people can identify that many of the most boring and stale people they know are those which focus only on rationality. There are many common examples of "irrational" behavior which generally cannot be explained by economists. The main one which comes to mind is charity giving. Someone who strains their own finances in order to make a contribution to his/her local Boys and Girls Club, church, etc. may have made an economically unfavorable decision. Such donations, though, can often show the positive side of wealth in the human context rather than the economic.



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