At first, the thought of honesty having any impact on, or having a link to, the question of economic development and growth may sound odd. This is especially true of the Pakistani reader on economic issues, who is exposed to only a select list of macroeconomic indicators. It is as if the whole world of economics revolves around these indicators (GDP, inflation, trade deficit, budget deficit, taxation, etc., to name a few). As an economist, I can tell you that almost all economics discussed in Pakistani media is boring and repetitive. There is nothing new to offer to the public.
Thankfully, the world around us is big and the subject of economics is not so boring. In fact, from time to time, some exciting research turns up. I just stumbled across one such interesting research related to honesty. It is more on the ethical and social side of economics, away from glitzy charts and fancy equations that define much of economics nowadays. This research, in fact, makes students of economic history recall a famous (but little known) tract on economics by the man known as the father of modern economics, Adam Smith.
Smith is known for his magnum opus Wealth of Nations, considered the bible of laissez faire economic thinking. But even before that, Smith authored another profound masterpiece that tends to slip under the radar. As professor of moral philosophy, he authored the Theory of Moral Sentiments (1759) that shone light on the moral and ethical side of economics, and how the actions of the people may affect economic transactions and exchange. This book discusses the propriety of human actions, justice, ambitions, sympathy, benevolence, social passions, sense of duty, and other ethical considerations. He pontificates on how these actions tend to affect the society as a whole.
Although he does not explicitly state the interaction between these actions and economic outcomes, the famous concept of the ‘Invisible Hand’ makes its first appearance in this text. Put simply, the concept suggests that individual pursuit of self-interest indirectly results in the overall gain of a society. A butcher, for example, does not sell out of benevolence but out of a desire to make a living. But his act confers a benefit upon the society since people get what they want.
What underlies this transaction is trust, that the butcher is not being evasive about the quality or quantity of the product. If the butcher, for example, lies, the trust between the buyer and the seller breaks down, and mutually beneficial transactions suffer. Extend this scenario in terms of the whole economy, and the probable loss (both monetary and otherwise) magnifies stupendously.
Recently, four researchers ran an interesting experiment along the lines discussed above. They wanted to see how the spirit of honesty is affected by material incentives. Their findings are reported in paper titled Civic Honesty Around the Globe. Some previous studies have linked lack of honesty to various economic ills like tax evasion, corruption, contractual enforcement and erosion of mutually beneficial exchanges within an economy. Models pertaining to human behaviour predict that as material incentives change, so would the behaviour of individuals.
The authors tested the effects of material incentives on human behaviour by conducting a large scale experiment around the globe (355 cities, 40 countries). They placed ‘lost wallets’ at different places in these cities, gauging the reaction of people by altering the amount of money in the wallet. The ‘wallet’ in this case was a case containing a business card and a few other items, and the amount was either zero or equivalent to $13.45 in local currencies.
Without going into further technical details and conditions surrounding this experiment, it is pertinent to discuss the strikingly remarkable results. Overall, the researchers found that the rates of reporting/returning wallets increased significantly when there was money in the wallets, compared to when there was no money. Out of the 40 countries, this pattern held very strongly in 38 countries (Mexico and Chile being the ‘outliers’, or different from trend). Although the rates of reporting wallets varied across countries, there was no doubt about the absolute increase in rates of overall lost wallet returns.
The result that the rates of returning lost wallets increase significantly when there is money in it was astonishing enough to create a doubt in the mind of researchers: maybe the amount of $13.45 was not enough (or immaterial) to tempt a change in behaviour. To address this, the researchers then significantly increased the amount in wallet to $94.15 to gauge the resulting behaviour. Again, they found the earlier results hold, that is, rates of return increased with the increase in monetary amounts. Interestingly, when there was no money in the wallets, the rates of return were lower.
The results are not only very interesting, but they also open the possibility for further queries. The first and foremost conclusion is that homo economicus is not as selfish as some economic models (like neo-classical ones) make them out to be. Despite the monetary incentives to indulge in a dishonest behaviour, majority of the participants displayed ethical and honest behaviour by returning the wallets. What caused this behaviour? Perhaps a sense of feeling aggrieved for the person who lost the money, since it could create problems for that person. Maybe it was just an inculcated sense of honesty and civic responsibility that led to this behaviour. What about the fact that reporting rates fell when there was no money in wallets? Perhaps the person felt that since there was no material loss that could accrue to the loser, there was little incentive in worrying about the loss (the assumption here is that money’s utility is higher compared to a wallet or a business card).
As I opined, the research opens up the field in terms of more research possibilities and tempting queries. Interested readers are especially invited to go through the paper, which contains a wider array of explanations than stated here. Personally, one interesting point of this study that I noticed was that it did not cover Pakistan. I wonder what the results would have been had it been the case?
The interest in Pakistan arose in context of personal experience plus the last article that I penned, in which I argued that non-compliance in terms of taxation is primarily an issue of trust deficit between the government and the people that has widened over time. Similarly, my travels around the country and everyday experiences have suggested that there exists a lot of unethical behaviour within the society which makes it difficult to not only carry mutually beneficial business transactions, but also imposes a cost upon the society. Consider, for example, the level of lying that exists at every tier of the society, from top to bottom. It doesn’t matter in which trade one indulges, whether it is an ordinary exchange or a complex transaction, lying, cheating and adverse behaviour is pretty common.
But then there are examples like Edhi and hundreds like him who work selflessly to enhance socio-economic well-being of citizens. That is why it would have been mighty interesting to see the results if the experiment had been tried in Pakistan. Perhaps someday, big-time donors and the government would start working towards finding answers to these kinds of questions in Pakistan rather than concentrating upon known indicators and sectors that shed no light upon the psyche behind individual and aggregate decision making.
The writer is an economist
Thankfully, the world around us is big and the subject of economics is not so boring. In fact, from time to time, some exciting research turns up. I just stumbled across one such interesting research related to honesty. It is more on the ethical and social side of economics, away from glitzy charts and fancy equations that define much of economics nowadays. This research, in fact, makes students of economic history recall a famous (but little known) tract on economics by the man known as the father of modern economics, Adam Smith.
Smith is known for his magnum opus Wealth of Nations, considered the bible of laissez faire economic thinking. But even before that, Smith authored another profound masterpiece that tends to slip under the radar. As professor of moral philosophy, he authored the Theory of Moral Sentiments (1759) that shone light on the moral and ethical side of economics, and how the actions of the people may affect economic transactions and exchange. This book discusses the propriety of human actions, justice, ambitions, sympathy, benevolence, social passions, sense of duty, and other ethical considerations. He pontificates on how these actions tend to affect the society as a whole.
Although he does not explicitly state the interaction between these actions and economic outcomes, the famous concept of the ‘Invisible Hand’ makes its first appearance in this text. Put simply, the concept suggests that individual pursuit of self-interest indirectly results in the overall gain of a society. A butcher, for example, does not sell out of benevolence but out of a desire to make a living. But his act confers a benefit upon the society since people get what they want.
What underlies this transaction is trust, that the butcher is not being evasive about the quality or quantity of the product. If the butcher, for example, lies, the trust between the buyer and the seller breaks down, and mutually beneficial transactions suffer. Extend this scenario in terms of the whole economy, and the probable loss (both monetary and otherwise) magnifies stupendously.
Recently, four researchers ran an interesting experiment along the lines discussed above. They wanted to see how the spirit of honesty is affected by material incentives. Their findings are reported in paper titled Civic Honesty Around the Globe. Some previous studies have linked lack of honesty to various economic ills like tax evasion, corruption, contractual enforcement and erosion of mutually beneficial exchanges within an economy. Models pertaining to human behaviour predict that as material incentives change, so would the behaviour of individuals.
The authors tested the effects of material incentives on human behaviour by conducting a large scale experiment around the globe (355 cities, 40 countries). They placed ‘lost wallets’ at different places in these cities, gauging the reaction of people by altering the amount of money in the wallet. The ‘wallet’ in this case was a case containing a business card and a few other items, and the amount was either zero or equivalent to $13.45 in local currencies.
Without going into further technical details and conditions surrounding this experiment, it is pertinent to discuss the strikingly remarkable results. Overall, the researchers found that the rates of reporting/returning wallets increased significantly when there was money in the wallets, compared to when there was no money. Out of the 40 countries, this pattern held very strongly in 38 countries (Mexico and Chile being the ‘outliers’, or different from trend). Although the rates of reporting wallets varied across countries, there was no doubt about the absolute increase in rates of overall lost wallet returns.
The result that the rates of returning lost wallets increase significantly when there is money in it was astonishing enough to create a doubt in the mind of researchers: maybe the amount of $13.45 was not enough (or immaterial) to tempt a change in behaviour. To address this, the researchers then significantly increased the amount in wallet to $94.15 to gauge the resulting behaviour. Again, they found the earlier results hold, that is, rates of return increased with the increase in monetary amounts. Interestingly, when there was no money in the wallets, the rates of return were lower.
The results are not only very interesting, but they also open the possibility for further queries. The first and foremost conclusion is that homo economicus is not as selfish as some economic models (like neo-classical ones) make them out to be. Despite the monetary incentives to indulge in a dishonest behaviour, majority of the participants displayed ethical and honest behaviour by returning the wallets. What caused this behaviour? Perhaps a sense of feeling aggrieved for the person who lost the money, since it could create problems for that person. Maybe it was just an inculcated sense of honesty and civic responsibility that led to this behaviour. What about the fact that reporting rates fell when there was no money in wallets? Perhaps the person felt that since there was no material loss that could accrue to the loser, there was little incentive in worrying about the loss (the assumption here is that money’s utility is higher compared to a wallet or a business card).
As I opined, the research opens up the field in terms of more research possibilities and tempting queries. Interested readers are especially invited to go through the paper, which contains a wider array of explanations than stated here. Personally, one interesting point of this study that I noticed was that it did not cover Pakistan. I wonder what the results would have been had it been the case?
The interest in Pakistan arose in context of personal experience plus the last article that I penned, in which I argued that non-compliance in terms of taxation is primarily an issue of trust deficit between the government and the people that has widened over time. Similarly, my travels around the country and everyday experiences have suggested that there exists a lot of unethical behaviour within the society which makes it difficult to not only carry mutually beneficial business transactions, but also imposes a cost upon the society. Consider, for example, the level of lying that exists at every tier of the society, from top to bottom. It doesn’t matter in which trade one indulges, whether it is an ordinary exchange or a complex transaction, lying, cheating and adverse behaviour is pretty common.
But then there are examples like Edhi and hundreds like him who work selflessly to enhance socio-economic well-being of citizens. That is why it would have been mighty interesting to see the results if the experiment had been tried in Pakistan. Perhaps someday, big-time donors and the government would start working towards finding answers to these kinds of questions in Pakistan rather than concentrating upon known indicators and sectors that shed no light upon the psyche behind individual and aggregate decision making.
The writer is an economist