Economics is inextricably tied to moral behavior, though few economists will say that. It's time someone did.

In every financial transaction--whether you're selling a car, paying employees, or repackaging commodity futures as financial derivatives--there are ethical calculations that influence economic activity beyond the price. Sure, you can cheat a potential buyer and not mention that your 1996 Ford Mustang GT has a cracked engine block, in the same way that your boss can stiff you on overtime. If you get away with it you will succeed in making a short-term gain or see a bump in the next quarterly earnings report. But, if you eventually develop the reputation as someone who consistently defrauds the people you do business with, there is a good chance that the value of your net worth will be as negative as the moral values you embraced.

But why is it that businesses that are "too big to fail" don't seem bound by the same moral economy as the rest of us? It turns out that anthropologists may have some insight, not only on this question, but also how we might integrate our economic and moral values that so often appear at odds. Researchers have found that the interconnection between economics and morality is seen most clearly in small communities where everybody knows each other, everyone has a free choice in who they deal with, and gossip can make or break reputations. This is even the case for societies that look very different from our own.

For example, in 2006 the anthropologist Joseph Henrich and colleagues published a study in the journal Science (pdf here) based on their analysis of 15 different societies ranging from American college students to urban wage workers in Ghana to semi-nomadic foragers in the Bolivian rainforest. By having each group conduct a series of economic games, the researchers found that there was a positive correlation between how much people punished cheaters and the amount of altruistic behavior in the society as a whole. What's more, every society engaged in some form of costly punishment even though there was a great deal of variability between societies.

The researchers' conclusion was that altruistic punishment emerged in our species through a process of gene-culture coevolution. In other words, human psychology is biologically predisposed to enforce a system of fairness, but how much we do so depends on the culture we see reflected around us. This result was later supported by another study in 2010 that developed a model explaining how even "selfish genes" could promote altruistic traits.

Recently I published an article at Voices on Society, the public relations hub for McKinsey & Company: a management consulting firm whose clientele have included many of the top corporations in the Fortune 500. The question I was asked to address for a readership in the financial services industry was what can anthropology tell us about the nature of giving? The answer I offered was simple: quite a lot.

Rather than a simplified form of market economics, as Adam Smith assumed, hunter-gatherer economies are typically structured around giving practices that can best be described as a system of philanthropic debt obligations. A common feature in most of these communities—ranging from the !Kung Bushmen of the Kalahari desert to the Oroqen reindeer peoples of Inner Mongolia—is that both food and material possessions are freely given to those who need them based on an informal system of social responsibility. In many tribal societies, for example, praising another person’s necklace or pig creates a moral duty to present the item as a gift, according to the University of London anthropologist David Graeber, author of the 2011 book Debt: The First 5,000 Years.

What is crucial for these gift economies, however, is that there is no expectation of direct reciprocity, a finding that challenges the core assumptions of classical economics. “As with so many actual small communities,” Graeber writes, “everyone simply keeps track of who owes what to whom.” There is no marketplace, no precise accounting, and, except under rare circumstances, no tallying of the relative value of a given item, or what its fair recompense would be. All members of the society usually owe something to someone else, a social network of gratitude that fosters their overall spirit of altruism.

These gift economies are well known in the anthropological literature, with Polish-born British anthropologist Bronisław Malinowski's Argonauts of the Western Pacific (1922) and French sociologist Marcel Mauss' The Gift (1925) being two of the classics (also see Colin Turnbull's The Forest People). However, in addition to small-scale foragers or horticultural societies and those living in large industrial economies, there is considerable evidence that an innate sense of fairness exists in our closest primate relatives as well. Given that nonhuman apes also have cultural traditions it would not be surprising if a similar gene-culture coevolution was in operation, as may have been observed by primatologist Robert Sapolsky (pdf here) among one colony of baboons.

However, if it is the case that fairness and cooperation are intrinsic features of the human species (at least within groups) how can this information be used to promote a moral economy? This was the question posed by Yes! magazine for an article I wrote in April, 2013 called "Survival of the ... Nicest?" Building off of the latest research by Michael Tomasello, co-director of the Max Planck Institute for Evolutionary Anthropology in Leipzig, Germany, I suggested that if the human adaptation for complex cultural traditions has been integral to human evolution there may be the potential for a bottom-up reshaping of our economic culture:

Humans, more than any other primate, developed psychological adaptations that allowed them to quickly recognize members of their own group (through unique behaviors, traditions, or forms of language) and develop a shared cultural identity in the pursuit of a common goal.

“The result,” says Tomasello, “was a new kind of interdependence and group-mindedness that went well beyond the joint intentionality of small-scale cooperation to a kind of collective intentionality at the level of the entire society.”

What does this mean for the different forms of business today? Corporate workplaces probably aren’t in sync with our evolutionary roots and may not be good for our long-term success as humans. Corporate culture imposes uniformity, mandated from the top down, throughout the organization. But the cooperative—the financial model in which a group of members owns a business and makes the rules about how to run it—is a modern institution that has much in common with the collective tribal heritage of our species. Worker-owned cooperatives are regionally distinct and organized around their constituent members. As a result, worker co-ops develop unique cultures that, following Tomasello’s theory, would be expected to better promote a shared identity among all members of the group. This shared identity could give rise to greater trust and collaboration without the need for centralized control.

There is some support for this idea in the work of Elinor Ostrom, 2009 recipient of the Sveriges Riksbank Prize in Economic Sciences (the Nobel Prize of Economics). In a posthumous paper published in the Journal of Bioeconomics, Ostrom, who died in June, 2012, reviewed the results of her research on farmer-managed versus agency-managed irrigation systems in Nepal that included dams, tunnels, and water diversion structures of varying complexity. What she found was that twice as many of the farmer-managed systems had a rating of "Excellent" for physical conditions, technical efficiency, as well as economic efficiency. In contrast, the agency managers--the Asian Development Bank, the World Bank, CARE, and the International Labor Organization--received a rating of "Poor" three times more often for physical conditions, five times more for technical efficiency, and eleven times more for economic efficiency.

Because the local farmers developed the rules themselves and planned the irrigation structure based on their own needs, the end result was a more stable and sustainable system despite the great diversity of approaches that different farmers would take. Ostrom found the same results [pdf here] when local villagers managed their own forest conservation efforts rather than European or US-based NGOs. This suggests that cultural diversity is not merely something to value for its own sake, it could lead to greater economic value overall.

One thing that is clear is that if a path exists towards a moral economy we are not on it. Social scientists are increasingly reaching the conclusion that economics is a field in disarray. Not only is the economic outcome so often in conflict with our most celebrated moral principles, leading economists can't even agree on the core assumptions in their field. Despite the millions of dollars that go into economic think tanks and the construction of complicated financial models we can't even come to a consensus on whether government spending helps or hurts an economy in recession.

Anthropologists study how people behave in the real world and, I believe, have something of value to offer our more serious-minded colleagues. Furthermore, our current knowledge about how humans evolved offers us a perspective on the kind of small-scale population structure that our species thrived in for 99% of our existence on this planet. We obviously can't go back (at least not intentionally) but perhaps we can find a way to integrate this knowledge in order to create a flexible economy that encompasses both our human diversity and our shared morality. Since we now know that many of the assumptions about human nature that classical economics was based upon were either wrong or woefully incomplete, it is high time that other ideas be accepted around the table. With an economic system teetering on the edge of unprecedented inequality it would be immoral not to consider other options.


Update: A few economists have objected in the comment section to my statement that economics is a field in disarray. In 2009 the journal Nature published an article by economists J. Doyne Farmer and Duncan Foley in which they state that:

[E]conomic policy-makers are basing their decisions on common sense, and on anecdotal analogies to previous crises such as Japan's 'lost decade' or the Great Depression. The leaders of the world are flying the economy by the seat of their pants.

This is hard for most non-economists to believe. Aren't people on Wall Street using fancy mathematical models? Yes, but for a completely different purpose: modelling the potential profit and risk of individual trades. There is no attempt to assemble the pieces and understand the behaviour of the whole economic system.

Furthermore, in 2010, IMF economists Olivier Blanchard, Giovanni Dell’Ariccia, and Paolo Mauro published a paper in the Journal of Money, Credit and Banking entitled “Rethinking Macroeconomic Policy” [pdf here]. In the following quote they are referring to the diversity of strategies taken by different countries following the economic crisis of 2008:

[T]he wide variety of approaches in terms of the measures undertaken has made it clear that there is a lot we do not know about the effects of fiscal policy, about the optimal composition of fiscal packages, about the use of spending increases versus tax decreases, and about the factors that underlie the sustainability of public debts, topics that had been less active areas of research before the crisis.