is a Norwegian philosopher who teaches at Columbia University in New York and the Collège de France in Paris. After his extensive work on Leibniz, he became famous for his rigorous and mischievous critique of the fundamental principles of economic theory – self-interest and rationality. Among many books, he wrote Nuts and Bolts for the Social Sciences (Cambridge, 1989), and Explaining Social Behavior: More Nuts and Bolts for the Social Sciences (Cambridge, 2007).
The defenders of the free market believe it is “the best possible world” theorised by Leibniz, as in a purely rational world, based on the mere calculations of one's interest. But for John Elster, it’s high time we re-examine this common myth, by reintegrating emotions and beliefs into the equation.
Jon Elster is one of the sharpest minds of our time, as well as one of the most discreet ones. He’s not your typical philosophy professor either. This Norwegian speaks fluent French, lives in the United States, and teaches on both sides of the pond, at Columbia University in New York and the Collège de France in Paris. After completing a thesis on Marx under Raymond Aron, he worked as an assistant sociology professor at the left-leaning university of Vincennes, before moving back to his home country to teach in Oslo. He then taught at the University of Chicago alongside the great theorists of rational choice theory, a school of thought which seeks to formalise the way individuals make decisions. But starting from the cognitive and emotional biases which interfere with our choices, Elster soon set about critiquing the two founding tenets of economic theory: rationality and self-interest. “Individuals don’t just rationally pursue their interests,” he says, “they also need to see themselves as pursuing more than material interest.”
To understand the rationality of modern economics, you go beyond classical economists, all the way back to Leibniz... What can he teach us about economics?
Jon Elster : Leibniz certainly wasn’t a theorist of capitalism, since it hardly existed at the time, at the end of the 17th century. Although he possessed good management skills when supervising the lead mines in the Upper Harz region of Germany, he was essentially a mercantilist: he saw the economy as a zero-sum game, in which one person can only win at someone else’s expense – that’s a long way from the dynamic concept of growth you find in capitalism. But surprisingly, Leibniz did anticipate the spirit of capitalism, precisely in his writings on a completely different subject. His metaphysics are in fact an economic theory of the universe. In creating “the best of all possible worlds”, his God applies the same principle as an investor seeking to allocate rare resources, in order to maximise his gains. Leibniz theorises the idea of rational choice in a situation of scarcity. “The ways of God”, he writes, “are the simplest, the most uniform, and the most fruitful... It’s like saying a house is the best one could possibly build, using the same resources.”
So that would make God the very first business leader?
Yes, he carefully calculates his investment so as to maximise profits. Under objective constraints, both physical and rational, he must use the least possible space, time, and energy. That’s the exact same spirit as the “constrained optimisation” of the capitalist entrepreneur.
Nowadays, the economy is said to be rational. So has the market replaced God?
Neither the consumer seeking to maximise his utility nor the company owner seeking to maximise his profits need to see the whole picture, like God does according to Leibniz. Still, economists tend to see the market as omniscient or infallible, just like Leibniz’ God.
You believe Leibniz’ “optimal computation” makes him the instigator of “rational choice theory”. How come?
This is the idea that you should always use the least resources possible – in other words, “don’t cross the river to fetch water”. With every decision, we try to reach a goal in the most efficient way possible. It has sometimes been said that rationality is a Western, modern, and maybe even a masculine invention… That’s nonsense. In its simplest form, it’s part of the very concept of action. You can’t not want to be rational. The problem is that in many cases, before you act rationally, you need to form a belief. So how do we form these beliefs, preferences, emotions, and all the interacting mechanisms which interfere with individual and collective decision-making? We can reach true beliefs through irrational processes, just as we can reach false beliefs through perfectly rational processes...
Can irrationality be rationalised?
When I started working on these questions, irrationality was dismissed as that which can’t be explained... But today we have a positive theory of irrationality. We know of a range of mechanisms which predict the way we deviate from rationality. First you have different forms of cognitive bias: when the lack of information or the sub-optimal investment in extra information prevents you from forming a rational belief. In a married couple, for example, both the husband and wife might claim to have done more than 50% of the household chores... This could be a passionate, egocentric bias, but also a cold, cognitive one, because each party is perfectly aware of what they’ve done, but only imperfectly aware of what the other has done... So it’s not a justified belief, but a belief formed from a selective bias.
What’s a “belief-trap”?
That’s a belief which it would not be rational to verify by seeking more information: the predicted costs of such verification are such that any rational agent would have to give up on the task.
What about “pluralistic ignorance”?
That's a mechanism whereby no-one believes p, but each person believes that everyone else believes p. I was in Morocco when they were drafting their Constitution. It was believed that the king should maintain his authority on security matters, since he was very popular... That’s nonsense, I said. Each person might well believe that everyone else likes the king, even if no-one actually likes him. It’s like a house of cards: it can collapse at any moment, just like it did in the Arab Spring... That’s a typical example of a false belief. This bias can also help explain how the financial crisis unravelled.
‘Everyone thinks they’re craftier than everyone else, which is simply impossible’
You use the “prisoner’s dilemma” in game theory to show how an action which is rational for the individual can be irrational from the collective point of view... How does that work?
Two prisoners suspected of being accomplices are locked up in two separate rooms. The same proposition is made to each of them: if one denounces the other, he will go free and the other prisoner will receive a ten-year sentence; if they both denounce each other, they’ll both receive a five-year sentence; if neither denounces the other, both will receive a minimal sentence of six months. Now the common interest requires that they both refrain from denouncing each other. But individually, the rational strategy is to denounce the other. So here, the selfish choice is the dominant one, since it is individually rational… but ultimately it is sub-optimal: for both parties, it leads to a situation which is inferior to what it would be had they taken the altruistic option. Through some sort of rational spell, non-cooperation seems to have the edge over cooperation… It’s easier to let other people go on strike and reap the benefits of their sacrifice, for example; but if everyone did that, there wouldn’t be a strike!
Is the same mechanism at work when we try to predict what others will do?
It’s very wise to anticipate other people’s actions, to form a belief as to what they will do before deciding what I myself will do… but it’s also very disturbing. On the financial market, this logic can easily get out of hand. John M. Keynes used to say that it can generally reach the fourth level: beliefs about beliefs about beliefs about beliefs... But what’s interesting is that individual agents often think that the others are only capable of two or three iterations, so they think they're one step ahead… Each person thinks they’re craftier than the opponent. These “collectively incoherent beliefs” lead to unpredictable, perverse consequences. Because it’s simply impossible for everyone to be craftier than everyone else!
How can we overcome situations of radical uncertainty?
Certainly not through reasoning or calculating, but through action. Here we find Keynes’ theory of “animal spirits”. He wrote that “our decisions to do something positive can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” But our aversion to inaction can also lead us astray. In football, for example, we know that the best strategy for the goalkeeper is to remain in the middle. But goalkeepers don't follow this “rational” strategy... Moved by their “animal spirits”, they jump to one side or the other.
Besides the cognitive biases which disturb rational choice, you’ve also worked on emotional biases, which also interfere with our decisions…
Economists should read more novels! Proust’s characters from In Search of Lost Time often behave as if their choices followed some sort of “magical thinking”, which interacts from a distance. Saint-Loup wonders about his mistress, Rachel: “If I’m not loyal, why would she be?” According to Proust, “we’re sometimes inclined to abstain from the most secret infidelity, through fear that the one we love won’t.” Experimental psychology and game theory have since confirmed this idea: it’s very difficult to allow oneself to individually benefit from betrayal. We often choose to cooperate because of this “magical thinking”, which doesn’t make it any less efficient...
Is this “magical thinking” popular today?
Some investors do behave like Saint-Loup – they say to themselves: “If I do it, other people will”... But unfortunately, most of them have given up on anticipatory calculations. Model builders now make hypotheses about people's belief based on the distribution of subjective probabilities, rates of temporal discounting, etc. Investors just give the red light. These days, machines make the “rational” choice for us.
