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A Socio-Economic Letter #1
Dear Colleague,
I have long held that in order to study economic behavior, we need a different paradigm than the one provided by neoclassical economics. This was the reason I founded the Society for the Advancement of Socio-Economics (SASE), although from the beginning, far from all the members agreed with me on this point. In this and future letters I hope to reinstate the dialogue about this question. My purpose is NOT to take potshots at neoclassical economics; that would be like shooting fish in a barrel. In any case, you cannot beat a theory with nothing. The question is: how can we better explain, predict, and normatively assess economic trends, behaviors, and policies than we currently do? I give it my best shot in The Moral Dimension: Towards a New Economics. Beginning with this letter, I hope to dialogue with others on the same subject. Kindly note that if you send us a comment in return, we may publish it. We will, however, check with you if we need to make any editorial changes. Send your comments to comnetse@gwu.edu.
A good place to start is a recent article in The Economist with an essay on the question why people save (“Anatomy of thrift: What causes people to save and invest?” The Economist, 9/24/2005 p. 5). The Economist correctly reports that “the most influential theory of household saving is ‘the life-cycle hypothesis.’” This theory suggests that people “try to smooth consumption over their lifetime: they save little or nothing when young but more in their middle years if they have a good income...then draw down those savings in retirement.” Indeed, the creator of this theory received a Nobel Prize in economics. Note that the theory assumes that people have no motivation to leave assets to others, including their children, and hence will try to spend down their savings by the time they die. The truth is that the average older person who has assets leaves a great chunk of them to others, including family members and (more so in the U.S.) various institutions. For instance, the reason that there is fuss about the estate tax is that despite the numerous ways the rich can get around paying estate taxes, still the estate tax in the USA reflects an inheritance of the tune to nearly $98 billion per year (based on 2001 Center of Budget and Policy Priorities data: http://www.cbpp.org/5-25-00tax.htm). Some of it goes to cats and dogs and butlers, but most to one’s children. Frankly, it troubles me that a theory so incompatible with the facts continues to be the most influential one. It so wrongly depicts people as self-centered to the point they even are unmindful of their children. But-- to reiterate—until someone has a better theory of savings…
The second theory The Economist cites is the idea that people save for “precautionary reasons”. This would suggest that in places where government welfare is generous and popularly used, people would save less than places where it was less a part of the national culture. This is true for Japan but not for Germany, and many other EU members.
The third theory-- which directly conflicts with the first—is particularly questionable. The Economist suggests that people save in order to leave assets for their children, either out of altruism or-- to secure a commitment from their children to care for them in old age. To help one another and one’s parents or children is not a matter of altruism, but of abiding by prevailing social norms which one internalizes. This is the reason that members of some ethnic communities (e.g. Hispanics and Asians) are much more attentive to their elders and children than those of some other groups. Here we may have the beginning of a socio-economic theory of saving. Does anyone out there have any more data on this?
Any comments?
Sincerely Amitai Etzioni
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