Competition or Cooperation? Understanding Human Behavior in Economic Analysis

By Dr. Tim Thornton

Anybody familiar with economics, particularly with how economics is taught, will know full well how self-interest constrained by competition is regularly championed as a general recipe for progress.

However, the complexity of the real-world seldom matches the simplicity of this recipe. Indeed, many situations require a concern with the interests of others, and of cooperation rather than competition.

The fact that human behavior is guided by cooperation and concern for others would hardly be a revelation to the average person. So why isn’t such an obvious truth more evident within most economic analysis?

One useful way to address this question is to look at insights from Adam Smith: the 18th century philosopher and economist considered the father of modern economics.

In his book, An Inquiry into the Nature and Causes of the Wealth of Nations, Smith makes the point that self-interest and competition can sometimes produce social benefits. To support this point, economics textbooks often seize upon the following excerpt:

he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it

It is not hard to understand the logic of the argument: the businessperson, seeking only monetary profit, achieves this self-interested end by producing a good or service that is useful to others. This self-interested dynamic is overseen by market competition, which results in any over-priced or poor-quality product achieving few if any sales against the more attractive products sold by competing firms. On this basis, it would seem that the more selfish the business person, and the more intense the market competition, the greater the social benefit in terms of producing good quality products with low prices.

What is Wrong with this Story?

Narrowly considered, nothing: the story simply highlights some dynamics and processes that are often present in market activity. However, a broader examination reveals that it excludes many factors that attenuate and complicate the simple recipe of self-interest plus competition leading to efficient outcomes.

The most obvious objections to the standard story are that the pressure of competition and the motive of self-interest might just as easily prompt the businessperson to cheat their workers, mislead customers about the quality or safety of their product, impose production costs on third-parties and the environment, and collude with other producers to inflate prices. The media is rife with examples of corporations whose profit-motivated behaviors have generated socially and environmentally detrimental outcomes. For example, the oil giant ExxonMobil was found to have understood the science of climate change as early as 1977, more than a decade before it became a public concern, and allegedly spent millions funding climate denial efforts. Labor disputes and workplace exploitation are endemic throughout both developed and developing regions, often involving underpayment, excessive overtime, unsafe or poor working conditions, and debt bondage.

Furthermore, if economies of scale are present, then having more firms competing in the same market will raise production prices rather than lower them, all else being equal. Is increased market competition more or less socially beneficial, subsequently? This dilemma indicates that, beyond competition, more complex economic factors are at play in determining social outcomes.

More fundamentally, assumptions of perfect competition and self-interest often do not hold out in practice. In the real world, oligopolies, markets with small groups of large sellers, are quite common, as larger firms often take advantage of economies of scale to drive out smaller competitors and maintain their competitive advantage. Additionally, not all firms are driven purely by profit. For example, worker-owned cooperatives that allow employees greater say in their working environments, are likely to prioritize social and environmental issues, along with economic goals.

The story also misrepresents Adam Smith’s original contribution to economics, which presented a much more sophisticated and nuanced view of human behavior. Smith believed that human motivations are influenced by self-interest, as well as respect and empathy for others. In his other book, The Theory of Moral Sentiments, he argued that people’s self-interested motives are often held in check by their moral values.

Changing Our Approach to Economic Analysis

Turning from the murky origins of the conventional view of economics, contemporary research provides further reasons to change the way economics is practiced and taught. For example, economists Samuel Bowles and Herbert Gintis argue that some of our most distinctive characteristics as species are our propensity to cooperate, incur personal costs to uphold ethical norms and to go out of our way to help strangers. Of course, all such behavior is sensitive to institutional context, but in general, humans are a cooperative species.

By drawing on insights and experiments from social psychology, behavioral economics brings economic analysis closer to the real world. It demonstrates how psychological tendencies and collective group dynamics influence economic decision-making, thus, posing a critical challenge to the assumptions of rationality and utility maximization that undergird neoclassical economics. The ramifications are important, especially for policy design. For example, it helps policymakers better account for the role of social norms and bias in race-or gender-based economic inequality.

Cooperation is essential not only for survival, but for economic success. Yet, governments consistently fail to develop agencies that promote cooperation. Effective cooperation does not spring magically into being and then sustain itself indefinitely. Designing effective institutions is essential to preventing self-serving persons or entities from exploiting cooperative arrangements. Self-interested incentives, while still relevant, can then be considered in tandem with the formation and maintenance of pro-social preferences, beliefs and institutions. The Prosocial website is one resource among many that offers intellectually solid and practically useful guidance for promoting cooperation in any group.    

Economics teaching, research and policymaking needs to let go of its obsession with self-interest and competition and get to grips with cooperation and other-regarding behavior. It can do this by utilizing more recent theory and evidence to keep the analysis closer to real world applications. Introducing students to the limitations of markets, and the psychological and social complexities of economic decision-making, represent an important start.

We would ask any other academic discipline to be up to date, we should now ask this of economics.


Dr Tim Thornton is a Senior Research Fellow at the Boston University Economics in Context Initiative and Director of the School of Political Economy in Melbourne. Anyone is welcome reproduce and repost this piece under the conditions of Creative Commons License CC BY-ND.


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