George Akerlof on Economics' Sins of Omission: The Imperative of Collective Action and 'We' in Crisis

George Akerlof, a Nobel laureate, discusses the profound economic and societal implications of the COVID-19 pandemic, highlighting the unprecedented unemployment rates and the dual need for massive government support for individuals and financial markets, a lesson learned from the 2008 crisis. He introduces a "third leg" of response: government direction and public compliance regarding medical problems to control the pandemic. Akerlof critiques the prevailing economic paradigm that often overemphasizes individual utility maximization, arguing that this perspective leads to "sins of omission" by neglecting the crucial role of collective action, externalities, and the "stories" people tell themselves that shape their decisions.

A key distinction Akerlof makes is between the individualistic "what I want" approach often assumed in economic models and the cooperative "what we want" that characterizes effective teams, families, and organizations. He uses the examples of COVID-19 self-isolation and historical anti-smoking campaigns (like Arizona's indoor smoking laws) to illustrate how individual actions have significant externalities, necessitating collective responsibility. Rob Johnson further elaborates on the challenge of increasing reliance on expertise amidst declining public trust and the commodification of social design, where powerful private entities can steer government decisions, leading to outcomes like the "polluters got paid" scenario of the 2008 bailout.

The practical insight is the urgent need to re-cultivate a sense of "we" – an "E Pluribus Unum" spirit – in society, moving away from hyper-competitiveness and self-interest. Akerlof advocates for an economics that integrates the "stories" people tell themselves, understanding their origins and consequences, rather than assuming rational actors. This shift would enable a more effective response to complex problems like pandemics and global warming, which demand team-based solutions and mutual respect. The current methodology of economics, while ingenious in model testing, has narrowed its scope, missing these fundamental human motivators and collective dynamics.

The broader implications extend to economic justice and societal well-being. Rob Johnson questions the utility function's implicit assumption that only those with "endowment" (money) count, arguing that a system where productivity doesn't guarantee a prosperous life for families is fundamentally unjust. Akerlof concludes that an "appropriate idea of we" and mutual respect are foundational for a just society, echoing Muhammad Ali's famous "Me, We" poem. The podcast underscores that a flawed imagination about collective action can become a self-fulfilling prophecy, leading to suboptimal outcomes for everyone and tolerating systemic wrongs in the name of individualistic "rights."

"in this time of crisis there needs to be massive government support for people the people of course who are displaced and for whom their income has crashed but there's also a need to uphold markets so the financial markets don't crash too."

"if you self-isolate yourself or if you follow what the directive that are set down by the health authorities you're not only protecting yourself but you're also keeping other people safe and so this is a case of big externalities."

"one of the things that concerns me about economics is it seems to have a fantasy on the one hand there are markets on the other hand there's the state and they're caught in this dynamic of the state's good and the market's bad which we'd call the far left the markets wonderful and the state just creates inefficiencies regulation what have you."

"I think the fundamental problem here is for some reason or other that the American people have lost the concept that we are a we and somehow life has become tremendously competitive for everyone both at the top and both at the bottom."

"when economics creates what you might call an imaginative palette where what you see is the rights of the individual the freedom to do what you want but without considering the rights of others not to be intruded on by you doing what you want it's a very odd consciousness."

"the way economics is typically constructed is they look at the individual and they see what the individual so that's called their utility and you rob you maximize your utility and I maximize mine and then the economic system gives us some sort of agreement that between yours and mine and that's called the equilibrium."

"the thing that motivates people in the choice they make is always I believe this is general it's always the story that they're telling at the time they make that decision."

"if your if the productivity of a vast number of people in the society does not allow them to have a meaningful and prosperous life and take care of their family so I don't even know what economic justice means unless you use the story that it's all about your responsibility it's all about your talent your perseverance whether you stayed in school as if you can control your own fate."

"I believe that if we go back to the American revolution which I mentioned once earlier we go back to the revolution what was taking place what there was that the Americans came together and they had they were having due respect for what the other people were thinking and that's what enabled them to fight the war in thereby to defeat the British."