Skip to main content

Advertisement

Advertisement

A new kind of economy is born

The Internet and social media have changed our way of decision-making. We are no longer the independent decision-makers we used to be. Instead, we have become networked minds, social decision-makers. This has several fundamental and dramatic implications — both for economic theory and for the way we need to organise our economy.

The Internet and social media have changed our way of decision-making. We are no longer the independent decision-makers we used to be. Instead, we have become networked minds, social decision-makers. This has several fundamental and dramatic implications — both for economic theory and for the way we need to organise our economy.

As we are more and more connected with others, the “homo economicus” — the self-regarding decision-maker and perfect egoist that is the main pillar of economic theory — is no longer an adequate representation, or even a good approximation, of human decision-makers. Reality has changed. Laboratory experiments show that the perfectly self-regarding decision-maker is not the rule but the exception.

They also show that markets, as they are organised today, are undermining ethical behaviour. Our application of an outdated theory is what has made economic crises more severe. Our economic institutions must be adapted to support the social decision-maker, the “homo socialis”.

Latest scientific results from my research group have shown that a “homo socialis”, with other-regarding preferences, will eventually result from the merciless forces of evolution. Another independent study was recently summarised by the statement “evolution will punish you, if you’re selfish and mean”.

Is this really true? And what implications would this have for our economic theory and institutions?

DO NICE GUYS FINISH LAST?

In fact, the success of the human species (as compared to other species) results mainly from its social nature. There is much evidence that evolution has created several different incentive systems in humans: Besides the desire to possess (in order to survive in times of crises), there is sexual satisfaction (to ensure reproduction), curiosity and creativity (to explore opportunities and risks), emotional satisfaction (based on empathy), and social recognition (reputation, power).

Recent experimental results suggest that the majority of decision-makers are of a “homo socialis” type with a preferences for equity- or equality-oriented fairness. The “homo socialis” is characterised by two features: Interdependent decision-making that takes into account the impact on others and conditional cooperativeness.

The “homo socialis” does not rip off some and then give back a few benefits through taxes or philanthropy. The “homo socialis” decides rather differently, more considerately, recognising that friendly and fair behaviour can generate better outcomes for everybody.

But social behaviour is vulnerable to exploitation by the “homo economicus”. In a selfish environment, the “homo socialis” cannot thrive.

In other words, if the setting is not right, the “homo socialis” behaves the same as the “homo economicus”. That’s probably why we haven’t noticed its existence for a long time — our theories and institutions are tailored to the “homo economicus”.

In fact, many of today’s institutions, such as homogeneous markets with anonymous exchange, undermine cooperation in social dilemma situations — that is, scenarios where cooperation would be favourable for everyone but non-cooperative behaviour promises extra benefits.

MINE THE VALUEOF REPUTATION

What would be suitable institutions for the 21st-century global information society? Let’s talk about reputation systems.

Most people and companies care about reputation. Reputation systems, which have spread on Web 2.0 like wildfire, could support socially-oriented decision-making and cooperation. People rate products, sellers, news and everything else, be it on eBay, Amazon or TripAdvisor — we are a “like it” generation, because we listen to what our friends like.

But it is important that such recommender systems do not narrow socio-diversity, as this is the basis of happiness, innovation and societal resilience. Reputation systems should be pluralistic, open and user-centric (not merely recommending what a company’s reputation filter thinks is best). As users, we must be able to choose or modify the filters ourselves.

Reputation creates benefits for buyers and sellers. A recent study shows that good reputation allows sellers to take a higher price, while customers can expect better service.

Reputation systems may also promote better quality as well as socially and environmentally-friendly production. This could be a new approach to achieving more sustainable production, based on self-regulation rather than enforcement by law.

One day, these systems may also be used to create a new kind of money. The value of “qualified money” would depend on its reputation and thereby create incentives to invest in ways that increase a money unit’s reputation. It might create a more adaptive financial system and help to mitigate the recurrent crises we are facing.

BENEFITS OF A SELF-REGULATING ECONOMY

The more personal interactions of reputation systems could overcome some of the unwanted side effects of anonymous exchange in today’s markets and help counter major social-dilemma problems such as global warming, environmental exploitation and degradation.

So far, governments have tried to fix these with top-down regulations and punitive institutions. However, these are very expensive and often quite ineffective. All industrialised countries suffer from exploding debts that we may not be able to pay for much longer. We need a new approach. As Albert Einstein pointed out: “We cannot solve our problems with the same kind of thinking that created them.”

Institutions supporting the “homo socialis”, such as suitably designed reputation systems, would enable a self-regulating socio-economic system. But self-regulation does not mean that everyone can choose the rules he likes; it only works with an other-regarding element, seeking a balance between the interests of all affected parties.

Self-regulation could also resolve the tension between the bottom-up organisation of markets and the top-down regulation of politics. This would remove a lot of friction from our current system, making it much more efficient — in the same way that the transition from centrally planned economies to self-organised markets has often created huge efficiency gains.

THE TRAFFIC CONTROL EXAMPLE

This can be illustrated with an example from urban traffic management. Traffic control is a problem where not everybody’s desires can be satisfied immediately and at the same time.

Our study compares three kinds of control: Centralised top-down regulation by a traffic centre, the classical control approach; and two decentralised control approaches. The first one assumes that each intersection independently minimises the waiting times of approaching vehicles, as a “homo economicus” would do. The second one decides in an other-regarding way: It interrupts the minimisation of waiting times, when this is needed to avoid spill-over effects at neighbouring intersections.

The “homo economicus” approach works well up to a moderate utilisation of intersections, but queue lengths get out of control long before the intersection capacity is reached. The bottom-up self-regulation based on the principle of the “homo socialis” approach beats both the other approaches, improving the coordination among neighbouring intersections.

A PARTICIPATORY MARKET SOCIETY

But will such a self-regulating system ever be implemented? In fact, it’s already on its way. Web 2.0, in particular reputation systems and social media, are driving the transition towards an Economy 2.0. We see already a new trend towards decentralised, local production and personalised products, enabled by 3D printers, app stores and other technologies.

Such developments will eventually create a participatory market society. “Prosumers” — co-producing consumers — the new “makers” movement and the sharing economy are some examples illustrating this. Just think of the success of Wikipedia, OpenStreetMap or GitHub. Open Streetmap now provides the most up-to-date maps of the world, thanks to more than one million volunteers.

This is just the beginning of a new era. A new intellectual framework is emerging, and a creative and participatory era is ahead. The paradigm shift towards participatory bottom-up self-regulation may be bigger than the shift from a geocentric to a heliocentric worldview.

If we build the right institutions for the information society of the 21st century, we will finally be able to mitigate some very old problems of humanity.

ABOUT THE AUTHOR:

Dirk Helbing is Professor of Sociology, in particular of Modelling and Simulation, and member of the Computer Science Department at ETH Zurich. He coordinates the FuturICT Initiative (www.futurict.eu), which focuses on the understanding of techno-socio-economic systems using Big Data.

Read more of the latest in

Advertisement

Advertisement

Stay in the know. Anytime. Anywhere.

Subscribe to get daily news updates, insights and must reads delivered straight to your inbox.

By clicking subscribe, I agree for my personal data to be used to send me TODAY newsletters, promotional offers and for research and analysis.