The Great Pendulum of the Psychological Economy

The great cycle

Back when I was in undergrad, on the first day of the first econ class I took (intro to political economy), the first thing the professor asked was “what is the goal we are looking for in economics, what is it that we are trying to achieve?” I was the first one to raise my hand, and the first thing I said was “well, I can tell you what we don’t want to see, and that is for everyone to lose trust of others and of the economy, and to become complete self-interested to the point that we no longer participate or cooperate in society and go into complete survival mode.”

I didn’t fully realize it at the time, but I was hinting at the two great forces in economics and in society at large.  The animal spirits within us can push us into different directions.  At the one end, is complete individualism, when we lose our faith in society and in each other, and we revert to our hunter gatherer roots.  At the other, is complete reliance on each other, working for others and getting all your vital needs from others.  One of the great themes in human history is the shifts back and forth between these 2 mindsets.  It is impossible to understand the societal and economic trends which have shaped civilizations without understanding this cycle.  If there is one thing that you ever need to know about political economy and human society, it should be this.

The formation

Why do humans choose to live in a society?  For millions of years we lived in small bands of hunter gatherers, looking out only for our closest of kin, providing for ourselves, only really caring about our own short term needs.  Then, somewhere along the way, something changed.  We started living in larger groups, we farmed our food instead of hunting and gathering it, we built temples, we traded and worked with each other.  Our villages turned into cities, our cities turned into nations, our nations turned into empires.  Humanity changed from a pack animal to a hive animal, the human super-organism was born.

Society of course is made up of individuals.  Humans most likely formed our societal arrangements purely out of subjective preferences: it made our lives better, and it was better than the alternative.  We choose to live in society because it gives us a materially better life than if we lived in the wilderness in solitude and were completely self-reliant.  Implicit in the societal arrangement is a social contract, we are all in this together, and we all need each other to make it work.  However there are times when it works well, and times when it doesn’t work as well.  Civilizations rise, flourish and fall.  Economies can boom, economies can stagnate.  What ultimately drives break downs and build ups? 

The Great Cycle

As society is made up of individuals, it is dependent on those individuals.  Our psychology is central to this.  Societal success is dependent on our expectations, when those expectations are good, society tends to do well, when they are bad, it tends to do worse.  At the end of the day all humans are ultimately concerned with the quality of their own lives, we usually make decisions that we think will make our lives better and avoid the ones we think will make it worse.  For example, if you are dating someone and you find them to be compatible with you in every way and they make you happy, you may have the expectation that they will make a good life partner, and thus you will be likely to stay with them.  If you are dating someone and you find there are wide differences, incompatibilities and they make you unhappy, your expectation of the future with them may be too bright, in which case you may be better off ending that relationship.  Because ultimately we are trying to use what we have to make a better life for ourselves.

When dealing with society and economies, these expectations are central as well, our expectations of the future will determine how we behave in the present.  When society is doing well and you are making money and continue to make money, you will have greater trust and reliance on society and the economy as a whole.  Instead of fixing the leaky pipe in your house you hire a plumber to do it, because you are making enough money at your job that it is actually cheaper to outsource this labor because the time spent on fixing it yourself is better spent making money somewhere else. 

When we expect that our future will be bleak, uncertain and austere, we tend to lose trust of society and rely on ourselves.  When we take a pay cut or lose our job, we are more likely to fix the leaky pipe ourselves, because it is now cheaper for you to save the cash and fix it yourself.  And of course when this happens across an economy many plumbers may lose a job, when we have less money we spend less money, when others are spending less money we are making less money.  The cycle can become vicious at times.

This cycle happens on both large and small scales.  And economies are often going in one direction or another.  At each end is a kind of economy, the market economy on one, the household economy on the other.  One could say that a true total market economy or total household economy do not actually exist, however they are simply directions which we tend to pull towards.  Some have referred to these

The Total Household Economy

In the total household economy one is completely self-reliant and does not economically interact with anyone outside of the small group he lives in.  All food is grown or caught by you and your family, also known as subsistence living.  All labor is done by you.  You are your own plumber, your own doctor, your own priest, your own farmer.  You hoard your excess goods rather than trade them.  You are distrustful of outsiders.  Your world is very small.

This could be described as a “Robinson Crusoe economy” of sorts.  Its important to realize that
outside of a few marooned sailors and isolated tribes very few humans have intentionally gone to this extreme.  Even in the hunter gatherer days there was some trading amongst groups of humans.  However there have certainly been times in history when society has been more household than market.  The best example is the Dark Ages.  The Roman Empire Collapsed, along with its vast trade networks.  The people of Europe moved out of the cities into the country and lived on a manor.  There they farmed their own food, made their own clothes and had their own closed in world.  There was much less trade, much less travel, society had become garrisoned in a series of manors that functioned as their own communes or sorts.  Culture suffered, education and literacy plunged, barbarians roamed the peripheries.  Society had become unreliable, as a result, people began to rely on the manor or the household, rather than on society as a whole. 

And of course this effect happens on a much smaller scale with economic booms and busts.  Events like the great depression were a miniature version of this contraction and inward focus.  And certainly the world as it is today is going through a contraction phase.  Is this just a temporary contraction or are we entering a secular trend like Rome did in its latter days?  Only time can tell, but hopefully this is just temporary.

The Total Market Economy

In the total Market economy you are completely engaged with and inter-connected with everyone else.  All your labor is outsourced, you buy all your food from the store, when you need medical help or a leaky pipe to be fixed, you seek a doctor or plumber to do it.  Professionalization does most work, and you too are a professional, tinkering away at your specialty which you do for others in exchange for money, you then use that money to obtain all the goods and services you need to survive.  There’s no need for grandma to fatten a goose in your backyard for Christmas dinner, it’s cheaper and easier to just buy one at the store ready to go. 

This should sound very familiar, though our civilization is not a total market yet (there are still many chores we do ourselves) we are certainly closer to this end of the spectrum than we are to the household economy described above.  One could say that the theoretical total market economy is a hyper-capitalist one, however it could also very easily be described as a post-market communist-esque society like Marx theorized.  All tasks are performed for others, from child rearing to food growing to taking the dog for a walk, we hardly need to do anything ourselves in this world, there is always someone there who is willing to do it for us.  The boundaries between families become blurred, we are all interconnected.  Perhaps the focus on this end is not that it is a monetized market society, but that it is a society where we are all reliant on each other and have complete faith in each other to meet each other’s needs.

The Real World

Of course, in reality the extreme ends of both spectrums do not exist, we are merely pulled in one direction or another.  But it is important to realize that these pulls exist.  The initial cause of a breakdown in society like what happened with Rome may not have been purely economic, it could be political, like an invading army, or climatic, like a cooling period that kills off crops.  However, once the expectations of the individuals who make up society change, it can quickly turn into a self-reinforcing cycle.  People spend less, become more isolated, do their own work.  This causes the market to retract, if people aren’t hiring you to work for them you too have less money to spend and you too will become more inward focused.  The cycle reinforces itself and can, in some circumstances, perpetuate itself for decades or even centuries. 

We are at a cross roads in this era.  We have great uncertainty in this world, our greenhouse gas emissions are warming the planet, yet our leaders are failing to take any meaningful action.  Each day that goes by without a solution makes our expectations bleaker.  Our society is becoming more divided, the gap between rich and poor is widening, the political gap between each other is widening as well.  On the one end are the anarchists you wish to destroy our governments, they do not want action on global warming, they do not want action on anything.  They wish to see society go backwards to a household economy, and in fact they glorify the pioneers and settlers and people of olden times who lived a more inward life.  To them the household economy is rugged individualism, and they despise all forms of collectivism. 

However, on the other side are those who see this desire as dangerous and fallacious.  They wish to see action taken on global warming, and know that only collective action can solve it, they know that attacking the sovereignty on governments is really an attack on the social contract and the bonds that keep us, as individuals living in a group, together.  They glorify the inner urge to do things for others, to act outside of our own self-interest. 

I of course am in the latter camp.  Our world faces great problems, problems which were collectively created, and can only be solved collectively.  To tackle an issue like climate change will take the greatest act of cooperative and collective action our species has ever endeavored.  To retreat back into the household is not a viable option, if we want a decent world for ourselves and our grandchildren we must be able to trust each other and work together.  This is a momentous time, and I can’t guarantee that we won’t retract like Rome did.  We shall either rebound from these latest contractions or we will divide ourselves and slowly and quietly go into the night.  However, if we succeed in coming together and meeting these problems, the human species will be stronger than ever.  The choice is ours, either we retreat to a more primitive reality, or we advance into a great future.  We cannot force people to change their expectations, but we can change the world on which those expectations are based. 

 

 

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