Being back in Glasgow for my fourth and final year at university I got myself a copy of Thomas C. Schelling’s Micromotives and Macrobehavior (1978) from the Andersonian library. I picked the book first and foremost as an introduction to behavioural approaches in Macroeconomics. However, one may regard it also as a critique of New Classical Economics.
Today I want to talk about the first chapter which is named after the book. Schelling opens the chapter with an example that should be familiar to most university students. He explains that he once gave a lecture to an audience of eight hundred people. The large amount of people is not surprising given his prominence. Yet what was striking was the distribution of the audience within the lecture hall:
All people were crowding in the back while the twelve rows in the front remained empty. Schelling first assumed that the seats had been allocated like this but he was soon to find out that the seating distribution in the hall was, in fact, voluntary.
But what does it have to do with Economics? Despite being a rather harmless example, it does illustrate the importance of micromotives in macrobehavior. Simultaneously, it stands in stark contrast with the interpretation of the situation from the viewpoint of Economics. When people make decisions economists tend to assume that they maximise their utility; that is, choose the best alternative available to them given their preferences. In Schelling’s example all seats were available to all the members in the audience. As a result, one would be inclined to conclude that the people preferred to occupy the seats in the back. Their preferences induced them to make this choice voluntarily because they maximised their utility by sitting in the back neither being able to understand much of the lecture nor having enough space to sit comfortably. Yet this would disregard the complexity of the situation at hand. What is more, the example anticipates a major lesson of the book:
“These situations, in which people’s behaviour or people’s choices depend on the behaviour or the choices of other people, are the ones that usually don’t permit any simple summation or extrapolation to the aggregates. To make that connection we usually have to look at the system of interaction between individuals and their environment.” (Schelling, 1978, p.14)
Schelling’s insights prove valuable for Economics because he offers a starting point to re-think our economy as a system in which everyone who reacts to the environment is also part of it. In doing so, his work is probably mostly in unison with Keynes’ idea of animal spirits. Both take a more behavioural perspective in macroeconomics. Both stress that people show contingent behaviour; that is, their behaviour is correlated with other people’s behaviour in the economy. For example, individuals’ goals, aspirations and views are going to be influenced by others’ goals, aspirations and views. One might also note that with the spread of social media and global interconnectedness the concept of contingent behaviour is more important than ever before. Yet the more general moral of Schelling’s story is that social interactions matter and they do matter for Economics. While we may carry on to assume that economic agents have certain preferences it is important to recognise that these are influenced by their environment and other people’s behaviour.
Besides, the moral for university lecturers might be to use Schelling’s insights to nudge their students to choose front seats over seats in the back. This might not only make lecturers happier but also students, helping them reach their true preferences of hearing well and having a comfortable seat. Yet one would need to know more about the emergence of the patterns of aggregate behaviour in the seating distribution to tweak it for the greater good.
Despite not being finished with Schelling’s book, I can clearly say that it is one of the most inspiring books in the sphere of Social Sciences and Economics I have come across so far. In my opinion it joins the ranks of Kahneman’s Thinking, Fast and Slow and Animal Spirits by Akerlof and Shiller and I hope that my post today inspired you to pick up a copy from your library as well!
Thanks for reading,
Schelling, T.C. (1978). Micromotives and Macrobehavior. New York: W.W. Norton & Company.