Threesville, Economics, and the FHE
How to understand economics
“Threesville” is a fictional society comprising just three people: Annie, Bobbie, and Callie. The three citizens of Threesville are not family members; hence, they have no familial obligations to one another; the three are independent, rational individuals. We can use the ultra-small society of Threesville to explore moral, political, and economic questions.
Considering questions about the political economy in such a small society promotes great clarity. As it happens, what we find true in Threesville we also find true in societies of most any size.
The citizens of Threesville reside together on a remote island isolated from other people. Its three citizens produce all the goods and services in Threesville. With only three citizens, Threesville does not use the social institution of money; all economic interactions occur by barter. Thinking about economics with money removed also promotes great clarity.
Annie is a smart, self-motivated, and talented woman. She is decisive, a natural leader, and physically attractive. Annie has the highest annual income and greatest wealth of all three citizens of Threesville (Annie’s income is goods and services she produces; remember, Threesville does not use the social institution of money).
Annie is an accomplished person who works hard, but she has also been lucky in life. She owns a lot of land in Threesville, some of which she acquired by homesteading, but some of which she acquired by purchase from Bobby and Callie several years ago. Annie lives well, but she also saves some of what she produces, thereby accumulating capital. She has an eye to the future, but doesn’t neglect enjoying the present.
Bobbie is an intelligent, fun loving, life loving sort who has great understanding of human nature. Neither pretty nor plain; Bobbie is just fun to be around. Annie and Callie like Bobbie, who is a natural, in just about every sense of the word; authentic. When Bobbie laughs, which is often, Annie and Callie can’t help laughing, too. And of course, like most people with such attributes, Bobbie does quite well in life. Though not as wealthy as Annie, Bobbie’s no pauper. Bobbie doesn’t worry much about the future; he believes the future will be just fine.
Callie is not particularly intelligent, not particularly confident, and not particularly talented. She also hasn’t been particularly lucky in life. Callie is rather ordinary in appearance. She works hard, but the work does not pay well (which is to say, Callie does not produce much in the way of valuable goods and services; money doesn’t exist in Threesville).
Callie is the “poor” one in Threesville, living pretty much from hand-to-mouth, as they say. Years ago, Callie sold most of the land she owned to Annie. Callie sold Annie the land that Callie had homesteaded (which is to say, she exchanged her land for other goods and services produced by Annie), because Annie offered a really high price, which Callie was quite happy to get. Callie worries a bit about the future, but she believes she has no means to prepare for it, so why worry too much?
Individuals choose actions they believe will yield themselves their largest net value.
This statement, the FHE – the Fundamental Hypothesis of Economics – is the bedrock of economics. If the FHE is a false statement, then economics would be mostly uninteresting and useless, instead of what it is, which is the social science that explains how individuals choose to use scarce resources in a social context to satisfy virtually unlimited human wants.
The FHE requires a bit of unpacking. “Value” is psychic satisfaction that occurs in an individual mind. “Cost” is value forgone; “benefit” is value gained. “Net value” is value gained minus value forgone. Value is subjective; one person’s treasure is another’s trash; beauty is in the eye of the beholder; there’s no accounting for taste. Just as it is in Threesville, value is not about money.
The FHE proposes that people choose actions purposefully; it does not claim that people always achieve their purpose; people make mistakes; people have cognitivie biases, as demonstrated by Daniel Kahneman, Amos Tversky, and Richard Thaler, who so ably illuminated what is called “behavioral economics.”
The FHE does not propose that people are “homoeconomicus,” those mythical creatures who carefully, rationally, and correctly maximize “utility,” a strawman concocted by critics of economics who do not quite understand economics.
The FHE claims people choose by comparing their alternatives and deciding which they believe will yield themselves their greatest net value. Experience and reason suggest strongly the FHE is a true statement about human nature.
In the dialogue below, Tyro is a young student; Solon is Tyro’s teacher.
~ ~ ~
Tyro: The FHE seems to say that people are selfish. Do you think that people are by their very nature selfish?
Solon: What do you mean by “selfish,” Tyro?
Tyro: Everyone knows what “selfish” means.
Solon: Since everyone knows, then you know, too. Tell me what “selfish” means.
Tyro: Selfish means caring about what you yourself want and not caring about what anyone else wants.
Solon: Do you care about what anyone else wants?
Tyro: Of course; I’m not selfish.
Solon: Why do you care what someone else wants?
Tyro: Because I don’t want to be selfish.
Solon: Why do you not want to be selfish?
Tyro: Because we should care about other people.
Solon: Why?
Tyro: (after some thought) If I didn’t care about other people I would be selfish, and that’s bad.
Solon: Why is it bad not to care about what other people want?
Tyro: Because that would be selfish.
Solon: Tyro, you seem to be going around in a circle. You said that being selfish is not caring about what other people want. Then you said we should care about what other people want, because not caring is bad, and that it is bad because not caring for other people is selfish. Do you see that you are begging the question about why selfishness is bad?
Tyro: (looking less than happy) Yes. But I have always been taught that not caring about what other people want is selfish, and that being selfish is bad.
Solon: You no doubt have been taught that being selfish is bad; but why would it be bad to want your own happiness?
Tyro: It cannot be bad to want happiness for ourselves. But we should also want happiness for others, shouldn’t we?
Solon: We each want to be happy by our very nature. But why do we care about the happiness of others?
Tyro: I care about the happiness of others because it makes me feel bad if I don’t, and it makes me feel good when I do.
Solon: Does that not mean that you care about the happiness of other people because it brings happiness to you?
Tyro: Yes.
Solon: Is that not selfish?
Tyro: I think you are trying to trick me.
Solon: No, Tyro. I am trying to see if you can give meaning to the word “selfish” that does not make every choice anyone ever makes a selfish choice.
Tyro: If the FHE is correct — if we all always choose those actions that yield the greatest value to ourselves — then it would seem that we always choose selfishly.
Solon: Just so, Tyro. But “selfish” is not a word that I would use. I think the FHE is correct. The FHE is a statement about human nature that I am persuaded is true. What do you think?
Tyro: The FHE seems to be true about most of my own choices, but sometimes I am altruistic, too.
Solon: What does it mean to be “altruistic”?
Tyro: Altruism means caring about the welfare and happiness of others over and above caring about one’s own welfare and happiness.
Solon: Why should people care about the welfare and happiness of others over and above one’s own? Please do not say “because it is good to care about the welfare and happiness of others.”
Tyro: Yes, yes, I know; that would beg the question. I can see that I’m running into the same problem with altruism that I ran into with selfishness. The statements “selfishness is bad,” and “altruism is good” are both opinions. They are both statements about what someone values or what someone should value.
Solon: Excellent, Tyro! Now, let us cut to the chase, as they say. Why does anyone value anything, whether the thing is an object, an action, or even a human quality?
Tyro: Because the thing generates happiness in the mind of the person doing the valuing.
Solon: You never cease to amaze me, Tyro! You are correct. Now what of selfishness and altruism?
Tyro: If I give a homeless man money, I do so because it makes me happy. So, I suppose someone could say that I am altruistic because I am selfish. How odd, though, to call altruistic behavior selfish.
Solon: I prefer not to call people or their behaviors selfish or altruistic, Tyro. I cannot give meanings to either term that distinguish the behavior of one human from another. I think the Fundamental Hypothesis of Economics is correct. I think that all people choose those actions that they believe will bring themselves their greatest happiness. That seems to me to be the nature of humans.
Tyro: So, people are selfish by nature? Somehow that seems so tawdry and base. Is that really human nature?
Solon: Tyro, you seem to be trapped by your words. Why do you say interest in one’s own happiness is tawdry and base? Suppose people were not self interested. Suppose people did not care about their own happiness. Can you even imagine such a world? Let us try. Let us visit Threesville, as it would be if people were interested only in the well-being and happiness of others above their own well-being and happiness.
~ ~ ~
Annie: Hi Bobby. Lovely day today. I’m here to do whatever will make you happy.
Bobby: Yes, it is a fine day, but no, no; the question is what can I do for you?
Annie: Wouldn’t you like me to hoe your corn?
Bobby: No, I will hoe the corn. The corn is not mine, of course. The corn is for you and Callie, not for me. I will take only as much corn as needed to keep me alive.
Annie: I would never be so selfish, Bobby. You and Callie shall have most of the corn, not me. I’ll take only a small amount to stay alive.
Bobby: (a little frustrated) Perhaps Callie will want most of the corn. In any case, I will hoe the corn.
Annie: I can’t let you do that Bobby. The reason I’m here is to help others.
Callie: Hi Annie; hi Bobby. I’m a bit hungry and would like to buy some of your corn Bobby. What is the price. I have eggs today. I would like a bushel of corn. How many eggs will you require?
Bobby: I will trade you a bushel of corn for one dozen eggs; no wait! Let’s say only eight eggs.
Callie: That’s ridiculous, Bobby. Your price is way too low; you must accept at least two dozen eggs for a bushel of corn.
Bobby: You insult me, Callie. On second thought, I will trade a bushel of corn to you for just six eggs.
Callie: (in a bit of a huff) Fine! I don’t think it’s right, but here are your six eggs. Incidentally, I’m taking no more than half a bushel of corn for them. That will mean I can’t make as much corn bread, of course, but I don’t mind. I’m here to serve others. I will make do with half the corn bread I had in mind.
~ ~ ~
Tyro: That’s just silly.
Solon: You are right, Tyro. The very idea of people not being interested in their own happiness is unimaginably silly.
Tyro: (after a longish silence) If we always make choices that bring us the greatest happiness, why do so many people say that self interest is bad and that placing the welfare of others above one’s own welfare is good?
Solon: I suppose that some people say it just because it is what they were taught. Perhaps we are taught that selfishness is bad and altruism is good because if we believe it, that belief gives some people power over us to get what they themselves value. That motive has certainly been a factor throughout the history of nation-states and other human organizations.
Tyro: What do you mean?
Solon: Think Threesville, Tyro. If Annie tells Callie that she is behaving selfishly, Annie evidently wants Callie to behave differently. The different behavior that Annie wants will bring Annie happiness at Callie’s expense.
Tyro: So, humans by nature are selfish? We should just get used to it?
Solon: You are persistent in clinging to that word, Tyro. As I said, I do not use the word “selfish.” You can use the word if you like, but it seems that all you will really be saying if you do use the word is that humans are human.
Excerpted from Morality and Capitalism: A Dialogue on Freedom. Future posts in Economics and Freedom will sometimes take us to Threesville.