PEOPLE AND PUBLIC POLICIES

There is a wide range of public policies, particularly in the realm of economic affairs. Examples include trade policy, fiscal and monetary policy, labor and technology policy, investment policy, and sector-specific policies. It is quite difficult to understand each one of them in depth.

That is why economic theories exist: they offer coherent packages of policies. These theories later serve as the foundation for economic models such as capitalism, the welfare state, socialism/communism, and others.

At the core of these theories lie fundamental behavioral assumptions about people. And while many may struggle to choose between different public policies, our self-awareness and experience in human relationships can guide us in identifying which economic theory we truly believe in.

In simplified terms, today two key behavioral assumptions are commonly recognized today (O. Williamson, Nobel Laureate, 2009):

• the degree of individual rationality;

• the individual’s relational embeddedness in groups.

  
  

1. Marxism and its associated models — communism and pure socialism — are widely regarded as the most utopian theory. They assume unlimited rationality and the human brain’s capacity to process all information, making centralized planning feasible. In this model, planning is conducted by appointed functionaries who determine how everyone will live.

This model rests on a belief in the altruism of the masses — a selfless concern for the well-being of others. It is described using phrases such as “an extreme case of monolithic collectivism,” “complete identification of functionaries with overarching goals,” “obedience,” and “the total absence of personal interest.”

Incidentally, such a setup can indeed be viable in small, homogeneous groups – for instance, within a family or a rural community consisting of a single clan. Even so, the boundless rationality of the leaders is questionable, and the model tends to break down as soon as it is taken outside its natural environment.

2. A more viable theory is the neoclassical one, centered around the capitalist model in its various forms. Its core premise is that people in large societies are far from altruistic – they are self-interested actors who pursue their own goals. As a result, centralized control over them is inherently unworkable.

But when people pursue only their self-interest, they unintentionally contribute to the welfare of others. Intense competition drives prices down, quality up, and spurs the emergence of new products and services.

However, capitalism also rests on the assumption of human rationality — that individuals are capable of making decisions for themselves. The key, therefore, is not to interfere, which explains the aversion to big government. This model relies on strong decentralization, for which Anglo-Saxon societies were well prepared. In other regions, attempts to replicate the model proved less effective, although they did manage to derive some benefits from it.

3. The new institutionalists offer a somewhat different theory. They call for incorporating more realistic assumptions about human behavior.

First, people are not just self-interested – they are opportunistic. That is, they don’t merely pursue personal gain but may also resort to deception, manipulation, and information withholding to benefit at the expense of others. This means violating or circumventing rules.

Second, people are only boundedly rational. No, they are not stupid. They strive to act rationally, but their cognitive abilities are limited. This is especially relevant today, when the volume of information is growing exponentially, and everything is becoming more complex.

What happens when you realize you cannot foresee all future risks, and you don’t trust others because they tend to act opportunistically? Any relationship becomes costly – in terms of both time and money. Consequently, processes slow down, incomes stagnate, and the country struggles to develop.

Why “institutionalists”? Because institutions are external mechanisms needed to overcome people’s limitations – they reduce transaction costs. The challenge is that each region has its own institutions, so there is no one-size-fits-all model to replicate. Capitalism, in general, is a great system – but China adapted it to its informal institutions, which is what distinguished it from Russia in the 1990s.

This brief and simplified overview serves to clarify the starting assumptions. Before discussing abstract economic policies, it is always useful to examine the “lenses” through which we view ourselves and those around us.