Posted on: 2019-12-23 18:57:56
According to American Psychological Association empathy indicates understanding a person from his or her frame of reference rather than one’s own .That is, vicariously trying to experience other person’s thoughts, feelings and perceptions.

Economic man is considered to be an individual who has unlimited capacity to make rational decisions. This also happens to be an assumption in Game Theory (John Nash, 1951) where an economic agent can make complex deductions arbitrarily which will maximize his satisfaction as a consumer or maximize his profits as a producer. He will make decisions that will maximize his self-interests according to his narrow self-interests by only paying heed to his wants and completely ignoring other’s wellbeing. According to Amartya Sen, the pitfall of this assumption is that the rationality is limited to selfish rationality. According to Sen1 “The purely economic man is indeed close to being a social moron “. This view of an economic man, in the last thirty years has been regarded as a flawed assumption. Humans although driven by self-interest, have occasionally if not always, have displayed empathetic behaviour while making decisions.

Adam Smith, in his work ‘Theory of Moral Sentiments’ has said that one must place oneself  in other person’s situation through imagination thus get  an understanding of  what it is to be like  that person when facing unique circumstances. He uses this interpretation in ‘Wealth of Nations’ to suggest that empathy creates a conducive environment for trade between two economic agents (Fontaine, 1997). Only when an agent will think through the perspective of the other agent he is dealing with will he be able to make an offer that appeal to the wellbeing of the other agent.

John Nash came up with what can be said as one of the most influential theories in economics – ‘The Game Theory’. The main proposition of the theory is that a person will make a decision that will maximize his satisfaction but this decision will be based on the behaviour of the other person. A person does not know how will the other person behave as they may not be in contact with each other, in such a scenario, trying to step into the shoes of the other individual will make his prediction of other’s behaviour accurate, that is, empathising with the other individual will lead to making decisions that may be the best possible outcome for all parties that are involved.

In a paper written by Artinger, Sääksvuori, Koppel and Exadaktylos2 ,they have talked about an experiment wherein people were either given electric shock or they were informed that their loved one was given an electric shock. It was seen that in both the cases, the brain signal given out was similar. They measured the differences in activation of the neural path giving out the brain signals. These differences were classified as difference in empathy levels between the participants. It was seen that differences in empathy led to individual differences in social preferences.

Negative externalities are often caused by lack of empathy. Consider this example, a firm which manufactures using chemicals releases its toxic waste products in the nearby river. This method from a very narrow economic perspective may be efficient as firm bears minimum cost and do not require complex operations to get rid of something that has no value. Their actions are causing a negative externality. Their production has indirectly led to people being exposed to contaminated water. In such a scenario being empathetic to the plight of nearby residents would have led to greater gains for the local economy. The people would be healthier and the company would be termed as a socially responsible firm, a tag that actually is an intangible asset for the firm thus creating goodwill in the market. Having responsible companies and a satisfied group of citizens is a positive sign for an economy.

According to a psychological research conducted3 it was observed that wealthier people show less empathy than people of lower classes. The wealthier class have access to a lot of resources which leads them to not being dependent on others. Their wealth coupled with their comfortable position in life leads to them having the opportunity to focus on themselves in a narrow minded manner. Thus they do not have the need to focus on others and what others are feeling. The gap in empathy seems to have a relation with income inequality. Although this has not yet been proved empirically, we cannot ignore the fact that among the developed countries, those who have cultures which shed light on empathy such as Japan and the Nordic countries have lower levels of income inequality than countries with highly individualistic cultures like that of USA.

Does being empathetic in all economic situations lead to the best outcomes?

Not always, psychologists have termed too much empathy as negative empathy. Here a person will empathise with another individual to the extent that one will be sensitive to other’s experience and may become overwhelmed by their experiences. This will lead to poor economic decisions as he may behave exactly the same way the other one behaves even if his behaviour will not maximize his satisfaction. Such kind of behaviour will lead to Pareto inefficient allocation as one has become better off but the person empathising got worse off in this case.

Empathy also leads to populist policies. For example a populist leader may empathise with the disadvantaged classes of the society and may implement policies that favour them but may affect the economy as a whole. A famous psychological study (Ilana Ritov and Jonathan Baron4) was conducted wherein respondents were asked to decide what would be an appropriate punishment for a company that produced a vaccine which led to the death of a girl. They were told that higher fines would result in company shutting down and no other company has produced alternatives for that vaccine. Irrespective of the consequences majority respondents said higher fines should be charged. This just shows that being empathetic could lead to market failure.

Even though empathy has been related to economics since the 18th century, for most parts of the 20th century it was not a topic that economists focused on. But with the emergence of Neuro-economics as a discipline, empathy has again become the centre of attention but its application to economics is still in a stage of infancy. In the end the scope for empathy in economics is boundless. Further research works may be able to tell us how it can be integrated in a better way especially in the field of behavioural economics.

  1. Nadeera Rajapakse (2015):Bringing Ethics into the Capitalist Model: Amartya Sen’s Approach to Economic Theory and Financial Capitalism

  2. Florian Artinger ,Filippos Exadaktylos,Hannes Koppel,Lauri Sääksvuori (2014): In Others’ Shoes: Do Individual Differences in Empathy and Theory of Mind Shape Social Preferences?

  3. Michael Varnum (2015): Social class affects neural empathic responses

  4. Ilana Ritov and Jonathan Baron (1993): Intuitions about penalties and compensation in the context of tort law

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