ALTRUISM, SAY'S LAW and UNEMPLOYMENT

Altruism is innate to the human brain, but we have not managed enough to exploit it socially to eliminate unemployment. Government could coordinate "altruistic win-win operations" for the benefit of companies and worker unions.

Neoclassical Economics is based on three "false truths". Their models suppose egoistic human beings, with unlimited will and unlimited rationality. None of these three parameters are real, being quite far from the man of flesh and blood.

In this way, neoclassical theory, forged at the beginning of the 20th century but still studied in universities, was designed with the assumption that economic behavior that seeks self-interest dominates the motives of altruism and benevolence, surpassing JS Mill's initial idea, who thought that the economist should elaborate his theories "as if the man were egoistic, although he was not completely", but not "knowing that the man is selfish", as it ended up imposing.

Altruism and Brain

The human being has an important sense of altruism. Being altruistic is the opposite of being selfish. Social Neuroscience shows that altruism is abundant in human behavior, being associated with specific patterns of brain activity. Today, advances in neuroimaging shows brain areas linked to altruistic behaviors, measured in real time, both in limbic regions (nucleus accumbens and anterior cingulate cortex), as in cortical regions (medial prefrontal cortex and temporoparietal junction).

Whether managing a charity fund, investing funds in a nonprofit organization, or giving alms to the poor, among others, there seems to be a sought-after sense of well-being in people, beyond what is advised by the economic calculation or the opportunity cost of capital, which allows to settle for a low or no retribution in terms of income.

So, if money and time are valuable assets in terms of opportunity costs, traditional economics can not explain why people, on certain occasions, are willing to stop earning high incomes to help others. Cognitive Neuroscience shows that people with ease to understand others (empathic) are more altruistic than the average. This ability is associated with activity in a region of the brain, known as temporoparietal junction (TPJ). 

What if altruism was a key to eliminate involuntary unemployment?

What comes first: supply or demand? Jean Baptiste Say, an economist who wrote at the beginning of the 19th century, suggests that supply creates demand. Say's law stipulates that, given a series of assumptions, if the supply creates its own demand, overproduction (the creation of goods and services without an equal flow of demand for those goods and services) is impossible.

However, and without having any interest in discussing the real applicability of Say's Law, reality shows us that there are notorious recessive periods, where involuntary stocks are generated in companies due to lack of demand, and also involuntary unemployment of people, as a result of this insufficient demand for goods and services, which leads to less workers being hired.

The underlying idea of ​​Say's Law is that, when additional production is created in the economy, it also generates, at the same time, the purchasing power necessary to absorb the additional supply; therefore, there should not be a great mismatch between supply and demand, causing unemployment. This law was the basis of the neoclassical idea of full employment in the economy.

The most liberal economists argue that Say's Law is often not fulfilled because of the political restrictions on full price and wage flexibility, which for example prevent workers from lowering their wages until the market rebalances. They may be right, but such political inflexibilities have come to stay, and they are structural to the democratic systems, where the weight of the unions is very strong. So ... the solution is not there.

Temporarily lower the rate of profits, instead of wages

What is real and indisputable, is that when Say's law is not allowed to be fulfilled, for whatever reason, many active people begin to lack employment, simply because companies begin to lack clients; and companies start to lack customers simply because workers begin to lack employment. However, that vicious circle can be broken with a win-win altruism.

If the entrepreneurs were willing to relativize a little their maximizer calculations of marginal product value, in order to take a little more employment than the optimum, and if that operative was coordinated by the government, to give systemic incentives to many companies, the decline in the corporate profit rate would be short, since the supply would create its own demand, with that incremental labor force that would spend its income on the goods and services that were accumulating in the stocks of the recession. And in this way, unemployment would fall, without lowering wages.

I already know that I am opposing all the economics books that we have studied in the university, the IS / LM model, the standard monetary theory, etc. What I am talking about is changing the mental model of entrepreneurs and financial markets, exploiting the innate altruism that we carry within, but not the altruism of giving alms, but a win-win altruism that would increase business profits and achieve full employment at the same time.

In this way, business altruism, to be win-win, should meet two conditions: a) to hire people a little beyond the optimum, and b) not pass to advanced inflation of the highest expected demand. If government coordination could be successful, the altruism would be win-win, since it would leave the recession and also eliminate involuntary unemployment at the same time.

In summary

Since altruism exists in an innate way, remember that the brain areas that empower it are already well known, and that can also be coordinated, from government and business organizations, what we are waiting for to launch new visions, new mental models, to diminish the scourge of unemployment, especially in the developing world, without lowering wages?

Author: Sebastián Laza

Sebastián Laza is a Behavioral Economist, specialized in the interrelation between Cognitive Neuroscience and Decision Making.

He also is the Executive Director of the Applied Neurosciences to Management and Economics Program (National University of Cuyo, Argentine) and the Neuroeconomics's Coordinator of the  of ​​the Latin American Institute of Applied Neurosciences (http://neurociencias.online/).

Additionally, he is the author of NEUROECONOMICS: THE DISRUPTIVE PATH (2018): https://www.amazon.com/NEUROECONOMICS-DISRUPTIVE-PATH-Sebastian-Laza/dp/1718177844