In one sense you are very right, on the other I think this is a very wrong way of thinking of these things.
At some point liberal economics-philosophy became very uncomfortable with the whole concept of ethics, norms, conventions and such. Slightly ironic as Smith was (IMO) a moral philosopher primarily (eg "The Theory of Moral Sentiments") with "economics" being a supplementary way of understanding right & wrong.
When you view the word entirely from an economics/incentives/meta-institutions I think you are giving up on some things that are extremely important. Societal norms, shame, morality: these are a natural and integral part of how human society works. Laws and regulations are important too, but one cannot replace the other. There is a problem with diffusion of responsibility combined with corporate mandates and institutional mentality eroding how people behave.
Taking the cold incentives view, you look at employment for example as an agreement fully captured in a contract with no further responsibilities on either side. It's negotiated based on market prices. That's true in one sense, but looking at employment that way does not capture a lot of crucial nuances. Treating it that way is not a natural way for humans to interact and will not achieve the best results, psychologically or economically. You need employees to be intrinsically motivated, believe in the company, belong, be obligated. They expect respect and care and empathy and responsibility from the employers. This is very basic and it plugs into parts of human behavior that are older than money and older than humans as a species.
Its hard to capture in an equation or a model. It's even hard to capture in a "theory" of psychology, sociology, history or whatever. So, there's a tendency by people trying to understand things to ignore these crucial elements. That's absurd. A society from a household to a company to a country cannot function based on individuals narrowly and coldly following their self interests (even though you can prove that they do).
More importantly, no "law" can work if the only reason anyone follows it is fear of punishment.
Very well put. And, as hard as it is to capture all those nuances in an equation or a model, the biggest problem is that there are too many theorists, and common people, believing that the "real market" is the one that comes out of the theory - with its completely unrealistic homo economicus - and not the real markets, those which develop in the real world and are so much more complicated, non linear, and working on human reactions.
A theory can be useful in dealing with complex situations. But believing that the theory can become the reality is the same mistake that marxists made.
Homo economicus is real. Economics is useful and its really important (though imperfect) way f understanding the complex interactions between people all over the world.
The problem is that we are not homo economicus. We are Homo Sapiens. Europeans & Mexicans & Italians and Londoners. Some of us are even Americans. We are also brothers and lovers and criminals and parents.
Homo Economicus is a a description of a certain set of homo sapiens character traits.
@netcan allow me to disagree. People make part of their choices partially basing them on rational reasoning (and, even for that part, mostly based on incomplete data and often faulty logic). But just check what works in marketing and you'll see how limited that rationality really is.
I mean "exists" in a pretty weak sense. If you present people with complex economic choices, they make rational choices and maximise their economic utility. IE if they are using second hand computers running hacked up linux to play movies on their TV and a good, cheap alternative presents at a lower price, most will eventually switch to that.
Describing them as such allows us to predict their behaviour.
And yet, if you're interested in studying these "moral effects" rigorously, you'll attempt to model them mathematically. Not necessarily with from-first-principles equations -- sometimes the big data / machine learning approach is best. Plenty of (most? all?) economists understand the need to model human irrationality in order to properly predict economic behavior, but if you ask me the solution is not to somehow adopt a less rigorous humanities approach to economics, like you seem to be implying.
I'm not purely incentive (that would be much too simple :).
We must use any and all tools at our disposal to ensure the correct working order of valuable systems - such as finance (proper allocation of capital to risk is a great thing!).
Exploiting human desire, psychology, biases, irrationality and behaviour to create robust systems is a great idea! The are just some of the many tools that we have at our disposal to protect ourselves from abuse by "nasty" agents. This then allows us to move forward towards a more prosperous, robust and stable society in the future.
What I don't like is treating the symptoms (these financial hackers if you will :), instead of the cause (improperly checks and balances at centres of power).
Bring on the shame and the like - I'm all for it. But we should at the very least focus on fixing the causes (exploits in the system) rather than the hackers that exploit them (just like in security research).
I'm sorry if It sounds like I was straw-manning you. I was replying to the general approach and I guess that is a straw man.
BTW, I often take a similar opinion to the one you iterated. You can probably see in the comment, I'm on the fence. I agree that yelling about ethics is very silly and won't change a system. Changing rules and working with incentives is the way that we, as societies, run by institutions can fix things.
On the other hand the mentality we are cultivating (in ourselves) by thinking this way is nihilistic and (poignantly) silly.
Anyway, if we are examining institutions, the corporation might be one to put under the glass. While corporations are an innovation (in law of all things!) that has created incredible wealth, it's also pathological. At least it generates pathologies in people. It narrows a company (group of people)'s duties to investor profits. That's not normal for humans. Humans are made to balance a wide set of "interests" and understand them intuitively. I don't mean to imply that signing a piece of paper suddenly makes a business pathological but internalizing the implied mentality does. That's happening on a global level.
At some point liberal economics-philosophy became very uncomfortable with the whole concept of ethics, norms, conventions and such. Slightly ironic as Smith was (IMO) a moral philosopher primarily (eg "The Theory of Moral Sentiments") with "economics" being a supplementary way of understanding right & wrong.
When you view the word entirely from an economics/incentives/meta-institutions I think you are giving up on some things that are extremely important. Societal norms, shame, morality: these are a natural and integral part of how human society works. Laws and regulations are important too, but one cannot replace the other. There is a problem with diffusion of responsibility combined with corporate mandates and institutional mentality eroding how people behave.
Taking the cold incentives view, you look at employment for example as an agreement fully captured in a contract with no further responsibilities on either side. It's negotiated based on market prices. That's true in one sense, but looking at employment that way does not capture a lot of crucial nuances. Treating it that way is not a natural way for humans to interact and will not achieve the best results, psychologically or economically. You need employees to be intrinsically motivated, believe in the company, belong, be obligated. They expect respect and care and empathy and responsibility from the employers. This is very basic and it plugs into parts of human behavior that are older than money and older than humans as a species.
Its hard to capture in an equation or a model. It's even hard to capture in a "theory" of psychology, sociology, history or whatever. So, there's a tendency by people trying to understand things to ignore these crucial elements. That's absurd. A society from a household to a company to a country cannot function based on individuals narrowly and coldly following their self interests (even though you can prove that they do).
More importantly, no "law" can work if the only reason anyone follows it is fear of punishment.