Does Humanomics Need a Moral Anchor?

 

This is a guest essay by Dr Edward W. Younkins, Professor of Accountancy and Business at Wheeling University, and Executive Director of its Institute for the Study of Capitalism and Morality. Ed is author of a trilogy of important books on freedom and flourishing: “Capitalism and Commerce”, “Champions of a Free Society”, and “Flourishing and Happiness in a Free Society”. He also has numerous other publications, including several published on this site. (Please see them listed after the end of this essay.)  

 Modern economics, particularly in its dominant neoclassical form, is often characterized by models that treat human beings as Homo economicus—rational utility maximizers responding predictably to incentives and constraints. This idealized abstraction enables precise mathematical modeling but, as critics argue, collapses the rich complexities of human behavior into a narrow calculus of preferences and payoffs. Homo economicus assumes coherent pref­erences, consistent rationality, and a reduction of social life to instrumental choices. But this framework struggles to account for trust, social norms, feelings of fairness, moral judgment, learning, culture, and meaning—features of economic life that we observe every day. 

 

 Enter Humanomics, a burgeoning intellectual movement that seeks to re-ground economic inquiry in the realities of human experience. At its core, Humanomics aims to integrate moral and social dimensions into the scientific study of economic behavior, recapturing insights from Adam Smith that have been marginalized in mainstream economic theory. Rather than reducing humans to narrow maximizers of utility, Humanomics treats them as sentient, social, purposeful, learning agents whose actions are shaped by sentiments, norms, ethical commitments, and reflective judgment.

 

The longest part of this essay reviews the work on this growing movement conducted by Nobel laureate Vernon L. Smith and experimental economist Bart J. Wilson. That portion of the essay is followed by a discussion of distinguished interdisciplinary economic historian Deidre Nansen McCloskey’s alternative, bur compatible, vision of Humanomics. This is followed by a discussion of neo-Aristotelian philosopher Douglas B. Rasmussen’s proposal that the traditional concept of homo economicus be replaced by dual concepts pf homo agens (acting man) and homo moralis (moral man).  An argument is then made that the neo-Aristotelian framework developed by Rasmussen and Douglas J. Den Uyl called Individualistic Perfectionism may provide a philosophical grounding for Humanomics.

 

 Adam Smith’s Philosophical Vision

 

To understand Humanomics, we must revisit Adam Smith (1723–1790) not merely as the author of The Wealth of Nations (WN)—often oversimplified as the father of free market economics—but also (and arguably even more importantly) as the author of The Theory of Moral Sentiments (TMS). Smith’s intellectual project embraced both economic systems and moral psychology. For Smith, markets emerge not in a vacuum but within networks of interpersonal relations guided by sympathy, propriety, and shared language. The often-quoted “invisible hand” metaphor in WN can only be read in full context when seen alongside his moral philosophy; humans are not egoistic automatons but social beings whose moral sentiments play a foundational role in shaping institutions and behavior.

 

Humanomics begins with this fuller Smithian anthropology: humans act purposefully, learn from experience, and are motivated by both self-interest and social sentiments like gratitude, resentment, trust, and fairness. Experimental evidence in economics, particularly from the works of Vernon L. Smith, shows that in simple game environments humans often behave cooperatively and reciprocally, even when self-interest alone would predict otherwise. These findings are hard to square with narrow neoclassical models but fit comfortably with a Smithian understanding of human nature as complex and multifaceted. 

 

Like Aristotle, Adam Smith focused on the cultivation of virtues and character building. Smith extended Aristotle’s ideas into modern commercial society. In turn, Humanomics builds on the connection between Aristotle’s eudaimonia and Smithian flourishing.

 

Humanomics as a Synthesis of Sentiments and Markets

 

In contemporary economic language, the dominant paradigm is sometimes referred to as Max-U: maximizing utility subject to constraints. Humanomics challenges this by asking a deeper question: What should the subject of economic theory be? If economics is a science of human wellbeing and prosperity, then it cannot abstract away the human condition; it must account for how people actually think, feel, communicate, and form norms.

 

In their 2019 book Humanomics: MoralSentiments and the Wealth of Nations for the Twenty-First Century, Smith and Wilson articulate a framework grounded in Adam Smith’s combined insights from TMS and WN. They argue that conventional economics has “lost sight of the full range of human feeling, thinking, and knowing in everyday life,” and that re-centering economics on sociality and sentiments enriches its explanatory power. Humanomics thus defines economics as a “science of human beings,” not simply a calculus of utility functions.

 

The core thesis of Humanomics is that economics must be re‑founded on a “model of sociality” that captures the full range of human feeling, thinking, and knowing. Smith and Wilson argue that the prevailing “maximize utility” (Max‑U) paradigm is inadequate because it reduces all action to outcome‑based preferences, ignoring the origins of action in moral sentiments and the context‑dependent rules that guide human conduct. In contrast, Smith’s model explains why people often act in ways that cannot be reduced to narrow self‑interest—for example, why subjects in anonymous laboratory games display high levels of trust and cooperation.

 Humanomics thus proposes a paradigm shift: from utility maximization to a “science of human beings” that integrates insights from TMS and WN into contemporary empirical analysis. This shift is not merely theoretical; it is driven by decades of experimental economics. Vernon Smith’s own Nobel‑winning work revealed that in market‑like settings, individuals often behave as narrowly self‑interested agents, while in personal social‑exchange games they exhibit strong other‑regarding tendencies. The Humanomics model reconciles these seemingly contradictory findings by appealing to Smith’s distinction between impersonal exchange (where anonymous rules of justice suffice) and personal social interaction (where fellow‑feeling and moral sentiments are paramount).

 Key to the Humanomics approach is its focus on rule‑following adaptation. Smith and Wilson emphasize that human beings are not merely preference‑satisfiers; they are rule‑followers who learn from social experience. We develop “rules of conduct” through observation, imitation, and the feedback of gratitude and resentment. These rules allow us to navigate both social and economic domains.

 

Extending Adam Smith’s Vision: Vernon  Smith and  Bart Wilson’s Contributions

 

Smith and Wilson extend several core ideas from TMS into contemporary economic analysis:

•  Fellow feeling (the capacity to enter into the emotions of others): Smith’s notion that we naturally project ourselves into the situations of others, sympathizing with their joys and sorrows, becomes a foundation for understanding cooperation and norm compliance in experiments;
•  Beneficence and justice: Smith calls beneficence (voluntarily doing good)  the “ornament” of society and justice its “main pillar”; Humanomics uses this to distinguish nonobligatory kindness from the strict norms whose violation calls for demands for redress; and
•  Impartial spectator (an imagined neutral observer): People internalize a standpoint from which they judge their own conduct. Humanomics treats this internalized judge as an explanatory mechanism for behavior that adheres to norms even when no external enforcement exists.

 

These themes allow Humanomics to construct non‑utilitarian models of choice in which rules, sentiments, and perceived propriety are primary, and utility is not reduced to felt pleasure or material payoff.

 Humanomics does not discard markets or rational choice altogether; it reinterprets them within a broader framework where market interactions are embedded in social relations. Markets are not mechanical devices for exchange but arenas where trust, reputation, norms, and sentiments actively shape outcomes. A simple market price is not just a number; it is a signal embedded in social practices and meanings. Similarly, cooperation in a trust game, or generosity in a dictator game, cannot be fully explained by narrow self-interest but makes sense when one accounts for gratitude, fairness, loyalty, and moral sentiment

 Smith and Wilson develop Adam Smith’s ideas in several crucial directions. First, they operationalize Smith’s moral psychology for experimental economics. They design games that test predictions derived from TMS, such as the role of gratitude and resentment in triggering reward and punishment. This provides empirical grounding for Smith’s often‑overlooked psychological insights.

 They develop a positive alternative to Max‑U. Instead of assuming that actions are driven solely by preferences for outcomes, Humanomics models action as rule‑governed and rooted in human relationships that involve what Smith called fellow‑feeling. This alternative framework not only explains anomalous experimental results but also offers predictive power about how people will behave in various social‑economic contexts.

 

In addition,  they re‑center economics on human flourishing. In their 2024 interview, Smith and Wilson connect Humanomics to the broader goal of human flourishing, which they describe as “discovery as a process that is adaptive and that anticipates new forms of knowing”. By restoring the moral‑social dimension to economic analysis, Humanomics seeks to inform policies and institutions that promote genuine human well‑being, not merely material efficiency.

 

A central insight of Humanomics is its emphasis on learning as a fundamental process. Unlike the static optimization models of neoclassical economics, Humanomics views human behavior as evolving through trial, error, reflection, and adaptation. Individuals do not come equipped with fully formed preference ordering; they learn who they are, what they value, and how their actions affect others. Experimental economics plays a crucial role here, providing empirical evidence about how people behave in controlled settings that approximate various institutional arrangements.

 

The result is a form of economics that is not just about equilibrium states but about processes of discovery. It recovers Smith’s method—humans are curious, puzzled by anomalies, and constantly refining their understanding. When models fail to predict observed behavior, Humanomics asks whether the underlying assumptions about human nature are the problem, not just whether the parameters are mis-estimated. 

 

Because Humanomics insists on incorporating social norms, sentiments, culture, and context, it naturally becomes interdisciplinary. It invites insights from psychology, anthropology, sociology, philosophy, and history into economic inquiry. This stands in contrast with an overly reductionist economics that isolates variables analytically while ignoring how human context shapes meaning and action. In real policy contexts—such as education, public health, public choice, or charity—Humanomic insights can lead to different conclusions than narrow cost-benefit analyses. Analysts must ask not merely whether a policy is efficient but whether it respects real human motivations, social norms, and institutional contexts. 

 Bart Wilson’s contributions to Humanomics focus on the moral ecology within which economic behavior takes place. Drawing on Smith, Wilson argues that human beings inhabit a world structured by rules — not only formal laws but informal norms of propriety, fairness, and respect. These rules are not arbitrary; they emerge from social interaction and are sustained by shared moral sentiments.

 Wilson’s concept of “moral ecology” refers to the environment of norms and expectations that make cooperative behavior possible. Just as biological organisms depend on ecological systems, human beings depend on moral systems that support trust and reciprocity. Markets, in this view, are not self‑sustaining mechanisms but institutions embedded in a moral ecology.

 Wilson also emphasizes the importance of language and grammar in shaping social rules. He argues that moral rules function like grammatical rules: they guide behavior without requiring explicit calculation. This analogy echoes Adam Smith’s observation that moral norms arise spontaneously from social interaction, much like language. Humanomics thus extends Smith’s insights into the contemporary study of rule‑governed behavior.

 

 Experimental Evidence and Field Applications

 

Humanomics has a strong empirical foundation in experimental economics. Laboratory games have repeatedly shown that people often act cooperatively and reciprocally in ways that standard Max-U models do not predict. In market experiments, trading behavior often approximates neoclassical predictions, but in social exchanges and repeated interactions, people reveal trust, fairness, and punishment behaviors inconsistent with narrow rational self-interest. Humanomics treats this not as noise to be explained away but as central phenomena that any reliable theory must account for.

 

Field applications extend this logic: for example, blood donation behavior and charitable giving often occur without direct material incentives but are driven by moral sentiments, social identity, and reciprocal expectations—patterns Humanomics explains in a unified framework rather than as anomalies. 

 

Vernon Smith’s experimental work especially provides empirical grounding for Humanomics. His experiments consistently show that individuals behave in ways that reflect moral sentiments rather than pure self‑interest. For example, in trust games, participants often send money to strangers even when there is no guarantee of return. In ultimatum games, individuals frequently reject unfair offers even at personal cost. These behaviors contradict the predictions of standard economic models but align closely with Adam Smith’s account of moral judgment.

 Vernon Smith interprets these findings through the lens of TMS, arguing that individuals care about fairness, propriety, and the approval of the impartial spectator. Humanomics thus bridges the gap between experimental results and classical moral philosophy. It shows that Adam Smith’s insights remain relevant for understanding real human behavior.

McCloskey’s Vision of Humanomics

 In Bettering Humanomics: A New, and Old, Approach to Economic Science (2021), Deirdre Nansen McCloskey offers a spirited critique of the dominant currents in contemporary economics and proposes an alternative vision she also calls Humanomics.  McCloskey, a distinguished economic historian trained across economics, history, rhetoric, and the humanities, argues that modern economics has become overly narrow in its methods and impoverished in its understanding of human agency. Her work is rooted in the conviction that economics should advance as a science of human betterment that integrates quantitative analysis with a deep appreciation of human motives, language, ethics, history, and culture. 

 McCloskey’s project is both a critique of modern economics and a revival of an older, richer tradition that traces back to Adam Smith. Her Humanomics emphasizes humans as purposeful agents embedded in moral worlds of meaning, speech, and persuasion rather than merely isolated utility maximizers reacting to incentives. This perspective challenges what she sees as the prevailing behaviorist and neo-institutionalist frameworks that dominate economics. 

 In addition to drawing on Adam Smith, McCloskey acknowledges debt to work by experimental economists Smith and Wilson. However, while their approaches overlap in their broad aim to re-humanize economics, they differ in focus and methodological commitments.

 At the core of McCloskey’s Humanomics is the claim that economics should be a discipline that genuinely takes human action seriously. For McCloskey, this means moving beyond the narrow positivism and behaviorism that treat human beings as reactive entities whose behavior is only meaningful insofar as it can be observed and statistically quantified. Rather, she calls for a science that recognizes humans as speaking, thinking, persuading, valuing, and moral beings. Human action, in this view, cannot be fully understood without acknowledging the roles of language, narratives, ethics, and culture. 

 Her critique is directed both at neo-institutional economics (which stresses the role of rules and institutions but tends to treat individuals as passive units responding to institutional constraints) and behavioral economics (which often focuses on systematic deviations from rational choice without adequately theorizing autonomy, meaning, and moral agency). McCloskey contends that these frameworks, in privileging observation over interpretation, fail to capture the why behind human actions and preferences. 

 A central move in McCloskey’s project is to reclaim the tradition of Adam Smith  as a thinker deeply attuned to moral sentiments, rhetoric, and the narrative dimensions of human life. McCloskey argues that classical political economy—and especially Smith’s work—treated human beings as ethical and rhetorical creatures. In her view, this older tradition offers a template for a more holistic economics that respects human complexity. 

 McCloskey also situates her Humanomics within a broader narrative: the Great Enrichment of the last few centuries, during which material living standards rose dramatically across much of the world. For her, understanding this transformation requires a focus on ideas, language, and values—the very realm that conventional models tend to marginalize. Material incentives alone are insufficient explanatory tools; instead, human rhetoric, ethics, and innovation are central drivers of economic progress. 

 McCloskey’s Humanomics calls for an interdisciplinary methodology. She argues that economics should retain the tools of mathematical modeling and empirical analysis, but also incorporate insights from history, philosophy, literature, and rhetoric.

 At a broad level, McCloskey and Smith and Wilson share a commitment to re-humanizing economics by restoring attention to moral, social, and rhetorical dimensions of human life. All three thinkers draw inspiration from Adam Smith’s holistic perspective and reject the narrow positivist view of human action. They agree that humans cannot be understood merely as reactors to incentives or as mathematical objects in maximization problems. 

 Both approaches emphasize interdisciplinarity and contextual richness rather than strict behaviorist reductionism. McCloskey’s Humanomics is particularly expansive in its inclusion of the humanities—language, history, rhetoric, and ethics—alongside economics. Smith and Wilson Humanomics, while acknowledging moral sentiments and context, tends to stay closer to an economic framework that can be operationalized in experimental and theoretical work. 

 

Rasmussen’s neo-Aristotelian Contributions

 

While Vernon Smith and Bart Wilson ground Humanomics primarily in a reinterpretation of Adam Smith and empirical findings, Douglas B. Rasmussen brings a philosophical depth that complements and extends the project.

 

In his recent work (2024), Rasmussen proposes replacing the abstraction of Homo economicus with the paired concepts of Homo agens (acting man), and Homo moralis (moral man). In this view, human beings are purposeful actors (Homo agens) who choose means to achieve ends, and they are also moral agents (Homo moralis) who evaluate not only the effectiveness of their actions but whether the ends themselves and the means to attain them are good for a human life. Unlike Homo economicus, which reduces behavior to utility calculations, this dual conception captures the ethical and purposive dimensions of human action. 

 

Rasmussen’s homo agens comes from Austrian economics and Ludwig von Mises’s “action  axiom” especially as interpreted by Murray Rothbard which holds that human action is purposeful behavior involving the use of scarce means to attain ends. Homo moralis adds the further question of whether the ends chosen and means employed are genuinely good for a particular human being (i.e., tying economic agency to the ethics of individual human flourishing).

 

Rasmussen maintained that neo-classical economists’ grounding of economics in universal self-interest and revealed preference is arbitrary and tautological (i.e., any consistent pattern of behavior can be interpreted as ‘utility maximization”), Rothbard’s homo agens avoids this by characterizing human beings as agents who pursue ends through chosen means, the content of which can be altruistic, egoistic, and so on. This supports a version of Humanomics that does not need homo economicus as a foundational assumption yet preserves economic theorems such as diminishing marginal utility as implications of purposeful action rather than hedonistic psychology.

 

Rasmussen’s framing resonates with Humanomics by emphasizing the agent’s reflective choice, not just behavioral regularities. It anchors Humanomics in a philosophical anthropology that recognizes human beings as rational, moral, and teleological—that is, oriented toward ends that are remembered, evaluated, and integrated within a larger conception of the good life. This aligns with classical and neo-Aristotelian notions of human flourishing, where economics cannot be fully separated from ethics and politics. 

 

Rasmussen’s broader philosophical work on human flourishing situates economics within a normative framework: economics is not just a positive science predicting behavior but a moral inquiry into conditions that enable humans to live well. Drawing on Aristotelian and natural law traditions, Rasmussen argues that flourishing involves exercise of reason, moral judgment, and substantive choice—aspects that narrow economic models often neglect. These philosophical foundations enrich Humanomics by giving it a normative anchor: preferences and choices are not just given but evaluated in terms of their contribution to a fulfilling human life. 

 

Rasmussen’s contribution to Humanomics is best understood through his broader neo-Aristotelian framework of individualistic perfectionism and his sustained work on human flourishing, moral agency, and political philosophy. Rasmussen does not approach Humanomics primarily as an economist, but as a philosopher concerned with the nature of human action, practical reason, and the ethical conditions necessary for individuals to flourish. His work provides Humanomics with a deeper normative and anthropological grounding that complements the empirical and Smithian recovery undertaken by Vernon Smith and Bart Wilson.

 

Rasmussen’s individualistic perfectionism holds that there is an objective standard of human flourishing grounded in human nature, but that flourishing must be achieved through the self-directed activity of individuals rather than imposed collective ends (Den Uyl and Rasmussen [2016]). This view aligns closely with Humanomics’ insistence that economic behavior cannot be reduced to mechanical optimization. Preferences are not merely given; they are formed, revised, and evaluated through practical reasoning over time. Economic choice, on this account, is inseparable from ethical self-authorship.

Under this view, policies or institutions that optimize efficiency but undermine agency, community, or moral sentiments may be judged inadequate. Humanomics, when infused with Rasmussen’s perspective, becomes not just a descriptive science of human behavior but a critically engaged social science that judges economic arrangements in terms of how they contribute to individual flourishing.

 

 Conclusion

 

Humanomics represents a significant intellectual shift toward a human-centered economics rooted in the full breadth of Adam Smith’s thought and enriched by contemporary philosophy. By privileging social relations, moral sentiments, and purposeful action, Humanomics provides a more holistic framework for understanding economic life. The contributions of scholars like Vernon Smith and Bart Wilson reorient economics toward a science of human beings, while philosophical thinkers like Douglas B. Rasmussen deepen its conceptual foundations by restoring moral agency and flourishing to the center of inquiry.

 

In an age where economic science faces criticism for its abstraction and detachment from lived experience, Humanomics offers a compelling alternative: one that holds onto the analytical rigor of economics while honoring the complexity of what it means to be human. In reviving Adam Smith’s unified vision of moral sentiments and economic life, Humanomics challenges the reductionism of modern economics and opens new pathways for interdisciplinary research. It invites economists, philosophers, and social scientists to reconsider the moral foundations of markets and the narrative structures that shape human action. In doing so, it honors Adam Smith’s legacy while extending his insights into the twenty‑first century.

 

Recommended reading

 

Bates, Winton. (2021) “Why Should Economists Practice Humanomics?” Freedom and Flourishing. October 4, 2021.

Den Uyl, Douglas J., and Douglas B. Rasmussen. (2016) The Perfectionist Turn: From Metanorms to Metaethics. Edinburgh University Press.

McCloskey, Deidre Nansen McCloskey. (2023) Bettering Humanomics; A New, and Old, Approach to Economic Science. University of Chicago Press

Rasmussen, Douglas B (2024), Homo Agens and Homo Moralis in Humanomics. The Independent Review.

Smith, Adam. (1759) 1982The Theory of Moral Sentiments.  Indianapolis: Liberty Fund.

Smith, Adam. (1776) 1981. An Inquiry into the Nature and Causes of the Wealth of Nations. Indianapolis: Liberty Fund.

Smith, Vernon L., and Bart J. Wilson. (2019) Humanomics: Moral Sentiments and the Wealth of Nations for the Twenty-First Century. Cambridge University Press, 2019.

Smith, Vernon L. and Bart J. Wilson. (2024) “Humanomics: An Interview with Vernon Smith and Bart Wilson.” 2024. Profectus Magazine. October 14, 2024.

 

Some other essays by Ed Younkins

Younkins, Edward W (2025) “What Contribution did David L. Norton Make to our Understanding of Ethical Individualism?” Freedom and Flourishing. January 18, 2025.

Younkins, Edward W. (2025) “How can dialectics help us to defend liberty?” Freedom and Flourishing. July 8, 2025.

Younkins, Edward W. (2025) “How can Austrian Economics be reconciled with the Neo-Aristotelian philosophy of Freedom and Flourishing?” Freedom and Flourishing. October 24, 2025.

Younkins, Edward W. (2025) “Can Polarized Moral Politics be Bridged by a Neo-Aristotelian Philosophy of Freedom and Flourishing?” Freedom and Flourishing. December 13, 2025.

What questions should I focus on in 2026?

Happy New Year!

If I had asked myself at the beginning of 2025 what questions I should focus over the next 12 months I would have mentioned the implications of declining economic growth rates in high income countries.  I have been particularly interested in the consequences of an increasing proportion of the populations of high-income countries coming to feel that their standard of living is worse than that of their parents at a comparable age. My research suggests that people tend to feel miserable when they assess their standard of living to be lower than that of their parents. I wrote several essays on that topic, including one entitled: How difficult would it be for individuals to adjust to zero economic growth?

I would not have predicted at the beginning of 2025 that during the year I would write an essay entitled: Are integralists opposed to natural rights? That was my most popular essay for the year, with over 4,000 views.

My interest in integralists followed serendipitously from my interest in the role of political entrepreneurship in institutional change. At the beginning of 2025 I was concerned to obtain a better understanding of political entrepreneurship because there seemed to be increasing support in liberal democracies for leaders who proposed changes in the rules of the game which were likely to have detrimental impacts on prospects for individual flourishing. Some essays I wrote on the topic attracted over 3,900 views. I revised those essays during the year and published a series of essays in November addressing issues related to the question: What impact does political entrepreneurship have on freedom and flourishing?

I would not have predicted at the beginning of 2025 that I would have the opportunity to publish four scholarly essays by Edward W. Younkins, on topics that are central to the purpose of this blog.  An essay reviewing books by David L. Norton, was published here in January, a review of Chris Matthew Sciabarra’s book “Total Freedom” was published  here in July, an essay entitled, “How can Austrian Economics be reconciled with the Neo-Aristotelian philosophy of Freedom and Flourishing?”, was published here in October, and an essay entitled, “Can Polarized Moral Politics be Bridged by a Neo-Aristotelian Philosophy of Freedom and Flourishing”, was published here in December. Those essays have all attracted a substantial number of readers.

What next?

It may be possible to predict what I will write about in 2026 from topics that I wish I could understand more fully. Those topics may provide the focus for my future reading.

In a recent post, I have already foreshadowed further reading related to political entrepreneurship and institutional change.

I also feel the need to improve my understanding of the implications of rapid advances in AI. I wrote a series of essays about robots and AI in 2015 and 2016 (one of the better ones is here ) but a lot has happened since then.

Another topic I would like to be able to understand is why birth rates are now below replacement levels in many high-income countries. Can this be attributed to economic insecurity, or has there been a fundamental change in values? Does it pose a threat to civilization, as some have suggested? Does it pose a problem for those of us who believe that human flourishing is an inherently self-directed process?

I don’t expect to be able to push back the frontiers of knowledge in any of the areas mentioned above but it would be nice to end the year with a better understanding of some of the issues involved.

It will be interesting to look back at the end of 2026 to what I have actually written about. I imagine the range of topics touched upon will be broader than the topics listed above. I also hope to be given the opportunity to publish more high-quality guest essays that are consistent with the purposes of this blog.

Why is a sensible person like you driving a car like that?

 

No-one has asked me that question yet, but I thought I should have a speech ready just in case it happens.

The car is a BYD Atto 3. It is an electric vehicle, made in China.

A sensible person? Why would anyone say I was a “sensible person”? Some people might think I would be sensible enough not to choose a car which takes more than half an hour to power up at a charging station, when I could have a car which could be filled with petrol in less than 5 minutes.

My wife and I don’t anticipate spending much time at charging stations. We have decided that at our age the time has come to stop driving on long trips. We expect to be able to charge our new car at home nearly all the time.

Our choice of car has more to do with saving money than saving the planet. I am not going to attempt to justify the government incentives that made this a good decision for us. I will just try to explain why our decision makes sense from our perspective.

The main reason why our decision makes sense can be illustrated from this graph which shows our production and consumption of solar power one day a few weeks ago. The horizontal axis shows the time of day and the vertical access shows power production and consumption in kWh.

 

• The orange area shows what we purchase from the grid at a cost of 42 cents per kWh. 
• The green area shows what we export to the grid. Before we bought the car, we received about 10 cents per kWh for about half of that and only 4 cents per kWh for the rest.
• The blue area shows the amount of our solar energy that we consume ourselves. You can see the point at which I plugged in the car around noon and the point at which I unplugged the car at about 5 pm.

It costs us about 64 cents in foregone revenue to have the car plugged into the power for 10 hours. In that time, we would have added 112 km to the distance we could drive. The cost of petrol to drive that distance in our previous car (Subaru forester) would have been about $20.

Before we bought the new car, we usually spent about $100 per month on petrol. I assumed that home charging might cost us $20 per month, allowing for some charging on cloudy days. So, I estimated that we could have a potential saving in total power bills (difference between saving in cost of petrol and additional cost of electricity) of about $80 per month or $960 per annum. There are also savings in the cost of servicing which have been estimated at around $350 per annum.

So, that means a total saving of about $1,300 per annum.

However, at this point, I needed to take account of the additional cost of EVs (electric vehicles) by comparison with ICE (internal combustion engine) vehicles. I used a KIA Seltos GT-Line FWD as the basis for comparison. At the time I was doing my calculations that was priced at around $47,000. That was about $3,900 less than the BYD Atto 3.

Since we are saving about $1,300 a year in running costs, the additional purchase price of the BYD Atto 3 would be recovered in about three years. That is much less than the expected life of the BYD's battery, which comprises a high percentage of the cost of the car. BYD offer an 8-year warranty on the car's battery.

We also looked at other electric cars. The comparable Tesla, VW and KIA cars were a lot more expensive at that time. The MG was cheaper, but we chose the Atto 3 because we liked its shape, color, and battery technology. Unlike the batteries in some other electric vehicles, the lithium iron phosphate battery in the Atto 3 can be fully charged frequently without degradation.

The Atto 3 has everything we were looking for. It has a range of over 400 km on a full battery. It fits our garage; has adequate boot capacity; it can be configured in a way that makes it fun to drive; and it has comfortable seats. It also has lots of safety features which can be switched on and off as required.

The car is naturally silent, but it can be made to emit sound so that blind people are able to hear that it is in their vicinity. I understand that for a few hundred dollars I might be able to make the car sound like an Aston Martin. However, my wife doesn’t think it is worth paying that price.

One thing that concerns me a little about buying a Chinese car is that it might be difficult to get spare parts if Australia goes to war with China. In that event, however, getting spare parts for the car might be the least of our worries.

Summing up

We have bought an electric vehicle because it suits our circumstances. We no longer drive long distances, and we have been exporting a lot of solar power to the grid.

The main point I would like to leave with you is that buying an electric vehicle can sometimes be a sensible choice, irrespective of any feel-good considerations about reducing CO2 emissions. At the same time, I admit that it does feel good to own a solar-powered car.

Addendum 1

This post was prepared for a speech delivered a couple of weeks ago at Charlestown Toastmasters. 

My wife and I purchased the car about 7 weeks ago. We have not yet visited a charging station.

I noted in my speech that I would not attempt to justify the government incentives that influenced our car purchase. I will now outline briefly the main impacts of government policies on the prices we faced.

It is possible that policies of the Chinese government provide an implicit subsidy to foreign consumers of Chinese-made electric vehicles. If so, I am grateful to the people of China for their assistance.

The cost of installing solar panels is subsidized by the Australian government. I expect we would still have installed solar panels if the Australian government had adopted a more rational approach to reducing greenhouse gas emissions, with a modest carbon tax rather than the mishmash of policies that currently apply. Even so, it may well be that a free market in energy without any carbon tax or other interventions would produce better outcomes for the people who live in this country, since our government's interventions have a negligible impact on the global climate.

The existence of fuel excise, which comprises a substantial proportion of the retail price of petrol, favours EVs relative to ICE vehicles. This excise is sometimes viewed as a road user charge. If that is appropriate, the absence of a similar charge on users of EVs is a price distortion favouring EVs relative to ICE vehicles.

However, in my view the fuel excise lacks the desirable characteristics of a road user charge – it doesn’t accurately reflect marginal costs of road usage, which are associated with congestion costs and road damage. It seems to me that there may be a stronger case for the fuel excise to be viewed as a carbon tax than as a road user charge. Purchase of fuel for use in ICEs is directly related to carbon emissions.  

That brings us back to the question of whether there is a case for Australia to have a carbon tax, given that Australian interventions have negligible impact on the global climate. If fuel excise cannot be justified as a carbon tax, it seems to me that a strong case can be made to eliminate this discriminatory tax, accompanied, if necessary, by an increase in a more broadly based tax such as the GST.

That leaves me doubting whether it would be possible to justify the government interventions that affect the prices on which our purchase decision was made. 

Nevertheless, from the perspective of individual consumers, distorted prices are a feature of the real world that they must accept. There is no prospect that relevant price distortions will be removed in the near future.

I will end on a personal note about the process I went through in contemplating purchase of an electric vehicle. There was an initial psychological barrier associated with the fact that I didn’t see myself as the kind of person who would own an electric vehicle, and particularly not one made in China. I had to acknowledge (to myself) that it didn’t make sense to see car choice as making an ideological statement - except insofar as basing the choice on utilitarian considerations could be said to be making an ideological statement.

I also needed to consider how I might feel if other people assumed that our choice of car involved some kind of virtue signaling about saving the planet from CO2 emissions. I decided that I would probably feel bemused rather than offended if that happened.

Addendum 2

In response to one of the comments below, I estimated the additional cost of electricity for a person in my circumstances who did not have solar panels. Assuming an off-peak rate of 22 cents per kWh, I estimated that the additional cost of electricity from ownerships of a BEV would be about $15 per month. That is still lower than the $20 per month I allowed in my calculation.

Addendum 3

John Freebairn has sent me the following comment relating to the suitability of the fuel excise as a road user charge.

"I offer some contrary arguments to your statement that the fuel excise is not a useful road user fee. Primarily, the fuel excise applies only to fuel purchased for use by on-road vehicles. The excise is exempt for all off-road vehicle uses, including mining, agriculture and shipping. The exemption does not make sense as a CO-2 pollution tax.

While one can agree that the correlation between  fuel consumption by on-road vehicles and social costs of road construction and maintenance, and of congestion, are not equal to unity, I'm sure they are positive. And fuel excise is a relatively simple and low cost tax or vehicle user fee. Modern technology may support more highly correlated and direct road user fees.

To exempt EVs from any form of road user fee means a subsidy and too much investment in and consumption of government supplied road services.

Another issue is that the fuel excise is not a hypothecated road user fee. In fact, the revenue is collected by the Commonwealth, and most road construction and maintenance is paid by the states and local governments. Yet, the Commonwealth in making its revenue grants to the states with advice from the Commonwealth Grants Commission includes consideration of relative costs across the states to provide comparable levels of road services per capita.

Reform of fuel excise as part of a pollution tax, and the introduction of a road user charge for all vehicles to reflect the social costs of investment and maintenance of roads and other transport infrastructure, policing, ambulances and other operating costs, should be on the tax reform agenda."

Part V: What information constraints confront political entrepreneurs?

 This essay is one of a series exploring the topic: What impact does political entrepreneurship have on freedom and flourishing? The series commenced with a Preface which provides a synopsis of the series and explains why I think it is important to obtain a better understanding of political entrepreneurship.

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This essay considers the information constraints confronting central planners and those political entrepreneurs who have less ambitious aims to promote widely accepted economic and social objectives. It is appropriate to begin by considering the motives of political entrepreneurs.

Motives of political entrepreneurs

Many assumptions that economists make about motives of political entrepreneurs are clearly wrong. Political entrepreneurs cannot maximize social welfare functions, even when they seek to promote the well-being of citizens.  They rarely set out to maximize the number of votes they obtain, even though they seek to obtain sufficient votes to win elections. They don’t necessarily set out to maximize the perks of office, or to use their positions to maximize personal wealth, even though such behaviour is common when the institutional context is conducive to it. The claims that many politicians make to be motivated by concerns for the well-being of the population they represent are not always deceitful.

Bryan Caplan suggests that to get ahead in politics, “leaders need a blend of naïve populism and realistic cynicism.” One reason why many politicians have legal training is because “the electoral process selects people who are professionally trained to plead cases persuasively and sincerely regardless of their merits” (Caplan 2007, p.169).

The easiest way to give the appearance of sincerity is to believe in the merits of the case you are pleading. Leon Festinger’s cognitive dissonance theory predicts that when people publicly advocate a position - especially if doing so requires effort or commitment - they tend to adjust their private attitudes to align with their advocacy to reduce internal psychological tension (Festinger, 1957).

Institutional context has important implications for the character of people who are attracted to a career in politics. Unscrupulous opportunists are likely to be attracted to political and bureaucratic positions in which they can obtain personal benefit by using discretionary powers corruptly. F. A. Hayek observed that “the worst get on top” in totalitarian systems because “while there is little that is likely to induce men who are good by our standards to aspire to leading positions in the totalitarian machine, and much to deter them, there will be special opportunities for the ruthless and unscrupulous” (Hayek 1994, pp.166-67).

However, an institutional context that is attractive to unscrupulous opportunists may also attract potential political entrepreneurs who see opportunities for institutional reform. More generally, reform-minded individuals may be motivated to enter politics when they perceive that current practices are resulting in adverse economic and social consequences.

Unfortunately, reform-minded political entrepreneurs are not a panacea. As discussed below, those who advocate further restrictions on individual liberty in their efforts to promote economic and social objectives may make matters worse. And, as discussed in subsequent essays, even when reform-minded political entrepreneurs who advocate greater economic and personal freedom succeed in attaining high office, they face substantial obstacles to achieving their institutional change objectives.

The perils of central planning

In a famous article, F. A. Hayek explained that the data a national planning agency would require to engage in rational economic planning exists only in a dispersed form in the separate minds of millions of people. Hayek observed that individuals possess unique knowledge of “the particular circumstances of time and place”, which they can use for their own benefit, and that of others, only if the decisions depending on it are left to them or made with their active cooperation (Hayek 1945, pp.521-2). Hayek suggested that we should look at the price system as a “mechanism for communicating information” because prices act to coordinate the separate actions of different people (Hayek 1945, p.526).

In The Road to Serfdom, Hayek noted:

“The question raised by economic planning is … not merely whether we shall be able to satisfy what we regard as our more or less important needs in the way we prefer. It is whether we shall be able to decide what is more, and what is less, important for us, or whether this is to be decided by the planner” (Hayek 1944, p.100).

In later writings, Hayek noted that as the adverse consequences of central planning became apparent, it came to have fewer defenders in the liberal democracies. However, arguments were still being advanced in favor of the state’s taking sole charge of providing various services that can be provided privately. He suggested that this also entailed the risk that people would be prevented from using their unique knowledge for their own benefit and would be denied the benefits of competitive experimentation:

“If, instead of administering limited resources under its control for a specific service, government uses its coercive powers to insure that men are given what some expert thinks they need; if people thus can no longer exercise any choice in some of the most important matters of their lives, such as health, employment, housing, and provision for old age, but must accept the decisions made for them by appointed authority on the basis of its evaluation of their need; if certain services become the exclusive domain of the state, and whole professions – be it medicine, education, or insurance - come to exist only as unitary bureaucratic hierarchies, it will no longer be competitive experimentation but solely the decisions of authority that will determine what men get” (Hayek 1960, p.261).  

In a book first published in 1985 Don Lavoie further explained the fundamental knowledge problem that political entrepreneurs are confronted with when they seek to plan economic activities. The most obvious implication is that it is impossible for markets to be replaced by comprehensive economic planning. However, more modest attempts to steer the market towards outcomes which planners consider to be desirable also obstruct the source of knowledge which is essential to rational decision-making (Lavoie 2016, p.56-7).

Lavoie points out that the only way we can know whether we are squandering resources by over- or under-investing in microprocessors or steel, for example, is via “the messages contained in the relative profitability of rival firms in these industries”. He adds:

“But this is precisely the information we garble when we channel money toward one or another of the contenders. Deprived of its elimination process, the market would no longer be able to serve its function as a method for discovering better and eliminating worse production techniques. Without the necessity of responding to consumers’ wants or needs, businesses would never withdraw from unprofitable avenues of production” (p.181).

Lavoie notes that advocates of industry policy disagree on the directions in which the market should be steered. For example, Felix Rohatyn wanted to funnel aid to sunset industries while Robert Reich wanted to funnel it to sunrise industries. He sums up:

“It is the main conclusion of the argument that I have called the knowledge problem … that there are no rational grounds on which Reich could ever convince Rohatyn or vice versa on such matters as are involved in economic change. As a result, such battles are sure to be fought with weapons other than carefully reasoned argument” (p. 200-201).

Lavoie notes that Rohatyn and Reich both argued that it is the responsibility of a strong leader to coordinate the actions of the rest of us (p.190). The coordination they had in mind seems to be more akin to the coordination that military leaders impose by giving orders to subordinates than the coordination among individuals that occurs voluntarily and spontaneously in a free market.

Lavoie argues that economic planning is inherently militaristic: “The practice of planning is nothing but the militarization of the economy”. In making that point he notes that the theory of economic planning was from its inception modeled after feudalistic and militaristic organizations (p. 230).

Some would argue that a degree of militarization is a price worth paying, or even desirable, to achieve a range of national objectives. Indeed, the conventional theory of democracy seems to entail top-down direction. Prior to elections, political leaders tell voters about their plans for education, health, social security etc. and are expected to implement those plans after they are elected. That view seems to imply the existence of some kind of necessary tension between democracy and markets. I will discuss that view later in this essay.

Knowledge required for governance

Gerry Gaus’s final book discusses, among other things, the question of whether the Open Society has evolved beyond “our” governance. Gaus seems to adopt F. A. Hayek’s view of the Open Society (or Great Society) as a society in which coercion of some by others has been reduced as far as possible and individuals are free to use their own knowledge for their own purposes.

Gaus alludes to the knowledge problem when he observes that “we seek to devise policies to improve” the functioning of the Open Society. However, “we do not have the knowledge and competency to do so, hence we are constantly disappointed by the last round of interventions and we blame the last government for its failures and broken promises” (Gaus 2021, p.13).

Gaus points out that when people do not endorse a policy imposed by planners, some tend to evade it. In commenting on the “passive population model”, he writes:

“Unfortunately, this view has been resurrected by those elites who continue to believe that the public is too ignorant to make its own decisions, and so should submit to “epistocracy,” or rule by those who know (aka, them). Not only, however, is such expertise essentially nonexistent in complex systems, but most actual agents in the Open Society are anything but passive materials to be guided by the elite: they are active, reflexive agents who make their own choices. When citizens do not endorse a policy, many will employ their resources to evade it” (Gaus 2021, p.244).

Gaus considers three levels of governance – macro, meso, and micro- and three dimensions of governance – goal directed, strategic, and rules-focused. A goal-directed governor identifies preferred states and seeks to move society toward them. A strategic governor seeks to solve strategic dilemmas to assist citizens to secure outcomes they all want. A rules-focused governor seeks to structure some of the rules of self-organization.

Gaus’s analysis leads to the following conclusions:

• There is little prospect for a governor to successfully pursue macro-level goals in a complex society. For example, efforts to promote development in particular societies are often unsuccessful because institutions cannot readily be transferred from on society to another.
• Attempts to structure the “rules of the game” at a macro level are more promising. In cooperation with the self-organized normative framework of society a governor may effectively shape the rules of self-organization e.g. via civil rights legislation.
• Goal pursuit at the meso level is a dubious enterprise. Pursuit of environmental, economic and welfare-targeted variables is a hit-and-miss affair because our social world is a complex system. It is not linear and determinate, as is often assumed. Successful goal pursuit in a complex world is usually a matter of “muddling through” (sometimes described as learning-based governance).
• Polycentric governance studies show that a focus on problem-solving tends to facilitate effective governance when publics share pressing strategic dilemmas.
• There may be grounds for more optimism about the prospect for micro governance than governance at other levels.

In writing about micro governance, Gaus makes a favourable reference to the work of Abhijit Banerjee and Esther Duflo. Gaus justifies his optimism about micro governance as follows:

 “When changes come up from the more micro levels, not only are they apt to garner the moral endorsement of actual citizens, but the Open Society will possess a diversity of normative networks. Because what works today may be dysfunctional tomorrow, a diversity of approaches is always critical. This itself upsets the moralist, who believes she speaks for the truth about justice, and sees most deviations from her plan as shades of immorality. But many of the diverse publics will not take up her solutions—many citizens will see different problems and possibilities, and their normative beliefs will lead them to different solutions” (Gaus 2021, p.240).

Can democracy be consistent with freedom?

Gaus and Lavoie offer similar views on the compatibility between democracy and freedom. Gaus suggests that “so far from being opposed or in tension, democracy and freedom need each other to thrive.” He suggests that a critical task of the democratic order is to ensure the equality and fairness on which large-scale human cooperation depends. However, unless it is “animated by a spirit of public justification, democracy itself becomes a mechanism by which some seek to impose their valued goals on others in the name of the people” (Gaus 2021, p. 245).

In his discussion of the view that there is some kind of necessary tension between democracy and free markets. Lavoie notes that we tend to think that “taking democracy too far undermines markets and that taking markets too far undermines democracy”. He attributes that view to “liberalism’s gradual drift into compromises with conservatism and socialism” (Lavoie 1993). He suggests that liberalism needs to reinterpret its notions of markets and democracy so that they are seen to be essentially complementary. Our economics needs to take account of the cultural underpinnings of markets and our politics “needs to move beyond the model of the exercise of some kind of unified, conscious democratic will and understand democratic processes as distributed throughout the political culture”. The force of public opinion is best perceived as the distributed influence of political discourses throughout society rather than as “a concentrated will”.

Lavoie argues that what we should mean by democracy is a distinctive kind of openness in society rather than a theory about how to elect the personnel of government:

“Democracy is not a quality of the conscious will of a representative organization that has been legitimated by the public, but a quality of the discursive process of the distributed wills of the public itself” (Lavoie 1993, p.111).

It seems to me that those who see merit in the view of democracy presented by Lavoie and Gaus have good reasons to be skeptical about the worth of top-down planning to achieve national objectives. Individuals have different priorities and objectives that deserve to be recognized. Top-down planning cannot give appropriate recognition to those individual differences. Moreover, given the peculiarities of the business of politics, as discussed in the preceding essay, well-meaning attempts to pursue economic and social objectives that are widely supported within communities are prone to diverted to serve narrow interest groups.

In the following essay I consider the consequences of institutional path dependence, first in slowing the emergence of interest group politics, and second in making it more difficult for reform-minded political entrepreneurs to restore freedom and enhance opportunities for human flourishing.

 

References

Caplan, Bryan., The Myth of the Rational Voter (Princeton University Press, 2007).

Festinger, Leon., A Theory of Cognitive Dissonance (Stanford University Press, 1957).

Gaus, Gerald., The Open Society and its Complexities (Oxford University Press, 2021).

Hayek, F. A., The Road to Serfdom (University of Chicago Press, 1994).

Hayek, F.A., “The Use of Knowledge in Society”, The American Economic Review, XXXV, 4 (1945).

Hayek, F.A., The Constitution of Liberty (The University of Chicago Press, 1960).

Lavoie, Don., National Economic Planning: What Is Left? (Mercatus Center, 2016).

Lavoie, Don., “Democracy, Markets, and the Legal Order: Notes on the Nature of Politics in a Radically Liberal Society” in Ellen Frankel Paul, Fred D. Miller, Jr., and Jeffrey Paul (Eds.) Liberalism and the Economic Order (Cambridge University Press, 1993).