‘There	is	no	such	thing	as	society.	There	are	individual	men	and	women,	and	there	are	families.’
MARGARET	THATCHER
‘The	corporations	don’t	have	to	lobby	the	government	any	more.	They	are	the	government.’
JIM	HIGHTOWER
Individuals	as	Heroes	and	Heroines
The	individualist	vision	of	the	economy
The	dominant	Neoclassical	view	is	that	economics	is	the	‘science	of	choice’,	as	we	saw	in	Chapter	1.
According	to	this	position,	choices	are	made	by	individuals,	who	are	assumed	to	be	selfish,	only
interested	in	maximizing	their	own	welfare	–	or	at	most	that	of	their	family	members.	In	doing	so,	all
individuals	are	seen	to	make	rational	choices,	namely,	they	choose	the	most	cost-efficient	way	to	achieve
a	given	goal.
As	a	consumer,	each	individual	has	a	self-generated	preference	system	that	specifies	what	she	likes.
Using	the	preference	system	and	looking	at	market	prices	of	different	things,	she	chooses	a	combination	of
goods	and	services	that	maximize	her	utility.	When	aggregated	through	the	market	mechanism,	the	choices
made	by	individual	consumers	tell	the	producers	what	the	demands	are	for	their	products	at	different
prices	(the	demand	curve).	The	quantity	that	the	producers	are	willing	to	supply	at	each	price	(the	supply
curve)	is	determined	by	their	own	rational	choices,	made	with	a	view	to	maximizing	their	profits.	In
making	these	choices,	producers	consider	costs	of	production,	given	by	technologies	specifying	different
possible	combinations	of	inputs,	and	the	prices	of	those	inputs.	The	market	equilibrium	is	attained	where
the	demand	curve	and	the	supply	curve	meet.
This	is	a	story	of	the	economy	with	individuals	as	the	heroes	and	the	heroines.	Sometimes	the
consumers	may	be	called	‘households’	and	the	producers	‘firms’,	but	they	are	essentially	extensions	of
individuals.	They	are	seen	as	making	choices	as	single,	coherent	units.	Some	Neoclassical	economists,
following	the	pioneering	work	by	Gary	Becker,	talk	of	‘intra-household	bargaining’,	but	this	is
conceptualized	as	a	process	between	rational	individuals	ultimately	seeking	to	maximize	their	personal
utilities,	rather	than	that	between	real-life	family	members,	with	their	love,	loathing,	empathy,	cruelty	and
commitments.
The	appeal	of	the	individualist	vision	of	the	economy	and	its	limits
Even	though	this	individualist	vision	is	not	the	only	way	to	theorize	our	economy	(see	Chapter	4),	it	has
become	the	dominant	one	since	the	1980s.	One	reason	is	that	it	has	powerful	political	and	moral	appeals.
It	is,	above	all,	a	parable	of	individual	freedom.	Individuals	can	get	what	they	want,	so	long	as	they	are
willing	to	pay	the	right	price	for	it,	whether	those	are	‘ethical’	products	(like	organic	food	or	fair	trade
coffee)	or	toys	that	children	will	forget	by	the	following	Christmas	(I	recall	the	Cabbage	Patch	Kids	fever
of	1983	and	the	Furby	craze	of	1998).	Individuals	can	produce	whatever	will	make	money	for	them,	using
any	method	of	production	that	maximizes	profit,	whether	footballs	made	by	child	workers	or	microchips
made	with	hi-tech	machinery.	There	is	no	higher	authority	–	king,	pope	or	the	planning	minister	–	to	tell
individuals	what	they	should	want	and	produce.	On	this	basis,	many	free-market	economists	have	argued
that	there	is	an	inseparable	link	between	the	freedom	of	individual	consumers	to	choose	and	their	broader
political	freedom.	Friedrich	von	Hayek’s	seminal	critique	of	socialism,	The	Road	to	Serfdom,	and	Milton
Friedman’s	passionate	advocacy	of	the	free-market	system,	Free	to	Choose,	are	famous	examples.
Moreover,	the	individualist	view	provides	a	paradoxical	but	very	powerful	moral	justification	of	the
market	mechanism.	We	as	individuals	all	make	choices	only	for	ourselves,	the	story	goes,	but	the	result	is
the	maximization	of	social	welfare.	We	don’t	need	individuals	to	be	‘good’	to	run	an	efficient	economy
that	benefits	all	its	participants.	Or,	rather,	it	is	exactly	because	individuals	are	not	‘good’	and	behave	as
ruthless	maximizers	of	utility	and	of	profit	that	our	economy	is	efficient,	benefiting	everyone.	Adam
Smith’s	famous	passage	is	the	classic	statement	of	this	position:	‘It	is	not	from	the	benevolence	of	the
butcher,	the	brewer,	or	the	baker	that	we	expect	our	dinner,	but	from	their	regard	to	their	own	interest.’
Appealing	though	they	may	appear,	these	justifications	have	serious	problems.	As	for	the	political	one,
there	is	no	clear	relationship	between	a	country’s	economic	freedom	and	its	political	freedom.	A	lot	of
dictatorships	have	had	very	free-market	policies,	while	a	lot	of	democracies,	such	as	the	Scandinavian
countries,	have	low	economic	freedom	due	to	high	taxes	and	plenty	of	regulations.	In	fact,	many	believers
in	the	individualist	view	would	rather	sacrifice	political	freedom	to	defend	economic	freedom	(this	was
why	Hayek	praised	the	Pinochet	dictatorship	in	Chile).	In	the	case	of	the	moral	justification,	I	have
already	discussed	many	theories,	including	the	market	failure	approach	based	on	the	individualist
Neoclassical	vision,	showing	that	unrestrained	pursuit	of	self-interests	through	markets	often	fails	to
produce	socially	desirable	economic	outcomes.
Given	that	these	limitations	were	well	known	even	before	its	ascendancy,	the	current	dominance	of	the
individualist	vision	has	to	be	at	least	partly	explained	by	the	politics	of	ideas.	The	individualist	view	gets
so	much	more	support	and	approval	over	alternative	visions	(especially	the	class-based	ones	like	the
Marxist	or	the	Keynesian	ones)	from	those	who	have	power	and	money	and	therefore	more	influence.	It
gets	such	support	because	it	takes	the	underlying	social	structure,	such	as	property	ownership	or	worker
rights,	as	given,	not	questioning	the	status	quo.*
Organizations	as	the	Real	Heroes:	The	Reality	of	Economic	Decision-making
Some	economists,	most	notably	Herbert	Simon	and	John	Kenneth	Galbraith,	have	looked	at	the	reality,
rather	than	the	ideal,	of	economic	decision-making.	They	found	the	individualistic	vision	to	have	been
obsolete	at	least	since	the	late	nineteenth	century.	Since	then,	most	important	economic	actions	in	our
economies	have	been	undertaken	not	by	individuals	but	by	large	organizations	with	complex	internal
decision-making	structures	–	corporations,	governments,	trade	unions	and	increasingly	even	international
organizations.
Corporations,	not	individuals,	are	the	most	important	economic	decision-makers
The	most	important	producers	today	are	large	corporations,	employing	hundreds	of	thousands,	or	even
millions,	of	workers	in	dozens	of	countries.	The	200	largest	corporations	between	themselves	produce
around	10	per	cent	of	the	world’s	output.	It	is	estimated	that	30–50	per	cent	of	international	trade	in
manufactured	goods	is	actually	intra-firm	trade,	or	transfer	of	inputs	and	outputs	within	the	same
multinational	corporation	(MNC)	or	transnational	corporation	(TNC),	with	operations	in	multiple
countries.1	The	Toyota	engine	factory	in	Chonburi,	Thailand,	‘selling’	its	outputs	to	Toyota	assembly
factories	in	Japan	or	Pakistan	may	be	counted	as	Thailand’s	export	to	the	latter	countries,	but	these	are	not
genuine	market	transactions.	The	prices	of	the	products	thus	traded	are	dictated	by	the	headquarters	in
Japan,	not	by	competitive	forces	of	the	market.
Corporate	decisions	are	not	made	like	individual	decisions
Legally	speaking,	we	may	be	able	to	trace	the	decisions	made	by	these	large	corporations	to	particular
individuals,	such	as	the	CEO	(chief	executive	officer)	or	the	chairman	of	the	board	of	directors.	But	those
individuals,	however	powerful	they	may	be,	do	not	make	decisions	for	their	companies	in	the	way	in
which	individuals	make	decisions	for	themselves.	How	are	corporate	decisions	made?
At	the	root	of	corporate	decisions	lie	shareholders.	Typically	we	say	that	shareholders	‘own’
corporations.	Even	though	it	would	do	as	a	shorthand	description,	it	is,	strictly	speaking,	not	true.
Shareholders	own	shares	(or	stocks),	which	give	them	certain	rights	concerning	the	management	of	the
company.	They	do	not	own	the	company	in	the	sense	that	I	own	my	computer	or	my	chopsticks.	This	point
would	become	clearer	if	I	explained	that	there	are	actually	two	types	of	shares	–	‘preferred’	and
‘ordinary’	(or	‘common’).
Preferred	shares	give	their	holders	priority	in	the	payment	of	dividends,	namely,	profits	distributed	to
shareholders,	rather	than	‘retained’	by	the	corporation.	But	that	priority	is	bought	at	the	cost	of	the	right	to
vote	for	key	decisions	concerning	the	company	–	such	as	who	to	appoint	as	the	top	managers,	how	much
to	pay	them	and	whether	to	merge	with,	take	over	or	be	taken	over	by	another	company.	The	shares	that
come	with	the	right	to	vote	on	those	things	are	called	ordinary	shares.	The	‘ordinary’	shareholders	(who
are	anything	but	ordinary	in	terms	of	decision-making	power)	make	collective	decisions	through	votes.
These	votes	are	usually	according	to	the	one-share-one-vote	rule,	but	in	some	countries	some	shares	have
more	votes	than	others;	in	Sweden,	some	shares	could	have	up	to	1,000	votes	each.
Who	are	the	shareholders?
These	days,	few	very	large	companies	are	majority-owned	by	a	single	shareholder,	like	the	capitalists
of	old.	The	Porsche-Piech	family,	which	owns	just	over	50	per	cent	of	the	Porsche-Volkswagen	group,	is
a	notable	exception.
There	are	still	a	considerable	number	of	giant	companies	that	have	a	dominant	shareholder,	who	owns
sufficient	shares	that	he/she/it	can	usually	determine	the	company’s	future.	Such	a	shareholder	is
described	as	owning	a	controlling	stake,	usually	defined	as	anything	upwards	of	20	per	cent	of	the	voting
shares.
Mark	Zuckerberg,	who	owns	28	per	cent	of	Facebook,	is	a	dominant	shareholder.	The	Wallenberg
family	of	Sweden	is	the	dominant	shareholder	in	Saab	(40	per	cent),	Electrolux	(30	per	cent)	and
Ericsson	(20	per	cent).
Most	large	companies	don’t	have	one	controlling	shareholder.	Their	(share)	ownership	is	so	dispersed
that	no	single	shareholder	has	effective	control.	For	example,	as	of	March	2012,	Japan	Trustee	Services
Bank,	the	biggest	shareholder	of	Toyota	Motor	Corporation,	owned	only	just	over	10	per	cent	of	Toyota’s
shares.	The	next	two	biggest	shareholders	owned	around	6	per	cent	each.	Even	acting	in	unison,	these
three	together	do	not	have	one-quarter	of	the	votes.
The	separation	of	ownership	and	control
Dispersed	ownership	means	that	professional	managers	have	effective	control	over	most	of	the	world’s
largest	companies,	despite	not	owning	any	significant	stake	in	them	–	a	situation	known	as	the	separation
of	ownership	and	control.	This	creates	a	principal-agent	problem,	in	which	the	agents	(professional
managers)	may	pursue	business	practices	that	promote	their	own	interests	rather	than	those	of	their
principals	(shareholders).	That	is,	professional	managers	may	maximize	sales	rather	than	profit	or	may
inflate	the	corporate	bureaucracy,	as	their	prestige	is	positively	related	to	the	size	of	the	company	they
manage	(usually	measured	by	sales)	and	the	size	of	their	entourage.	This	was	the	kind	of	practice	Gordon
Gekko	(you’ve	met	him	in	Chapter	3)	was	attacking	in	Wall	Street,	when	he	pointed	out	the	company	that
he	was	trying	to	take	over	had	no	less	than	thirty-three	vice	presidents,	doing	God	knows	what.
Many	pro-market	economists,	especially	Michael	Jensen	and	Eugene	Fama,	the	2013	Nobel	Economics
Prize	winner,	have	suggested	that	this	principal-agent	problem	can	be	reduced,	if	not	eliminated,	by
aligning	the	interests	of	the	managers	more	closely	to	those	of	the	shareholders.	They	suggested	two	main
approaches.	One	is	making	corporate	takeover	easier	(so	more	Gordon	Gekkos,	please),	so	that	managers
who	do	not	satisfy	the	shareholders	can	be	easily	replaced.	The	second	is	paying	large	parts	of
managerial	salaries	in	the	form	of	their	own	companies’	stocks	(stock	option),	so	that	they	are	made	to
look	at	things	more	from	the	shareholder’s	point	of	view.	The	idea	was	summarized	in	the	term
shareholder	value	maximization,	coined	in	1981	by	Jack	Welch,	the	then	new	CEO	and	chairman	of
General	Electric,	and	has	since	ruled	the	corporate	sector	first	in	the	Anglo-American	world	and
increasingly	in	the	rest	of	the	world.
Workers	and	governments	also	influence	corporate	decisions
Though	it	is	not	common	in	the	US	and	Britain,	workers	and	the	government	also	exercise	significant
influences	on	corporate	decision-making.
In	addition	to	trade	union	activities	(which	we’ll	explore	below),	workers	in	some	European	countries,
such	as	Germany	and	Sweden,	influence	what	their	companies	do	through	formal	representation	on
company	boards.	In	particular	in	Germany,	large	companies	have	a	two-tier	board	structure.	Under	this
system,	known	as	the	co-determination	system,	the	‘managerial	board’	(like	the	board	of	directors	in
other	countries)	has	to	get	the	most	important	decisions,	such	as	merger	and	plant	closure,	approved	by
the	‘supervisor	board’,	in	which	worker	representatives	have	half	the	votes,	even	though	the	managerial
side	appoints	the	chairman,	who	has	the	casting	vote.
Governments	are	also	involved	in	managerial	decisions	in	large	corporations	as	shareholders.
Government	ownership	of	shares	in	private-sector	companies	is	much	more	widespread	than	people
think.	Stora	Enso,	the	world’s	largest	paper	and	pulp	manufacturer,	is	25	per	cent	owned	by	the	Finnish
government.	Commerzbank,	the	second-biggest	bank	in	Germany,	is	also	25	per	cent	owned	by	the
German	government.	The	list	can	go	on.
Workers	and	governments	have	different	goals	from	those	of	shareholders	and	professional	managers.
Workers	want	to	minimize	job	losses,	increase	job	security	and	improve	working	conditions.	The
government	has	to	consider	the	interests	of	groups	that	go	beyond	the	legal	boundary	of	the	company	in
question	–	for	example,	supplier	firms,	local	communities	or	even	environmental	campaign	groups.	As	a
result,	companies	with	strong	worker	and	government	involvement	in	management	behave	differently	from
companies	dominated	by	shareholders	and	professional	managers.
Volkswagen	and	the	complexity	of	modern	corporate	decision-making
Volkswagen,	the	German	car-maker,	showcases	the	complexity	of	modern	corporate	decision-making.	It
has	a	majority	owner,	the	Porsche-Piech	family.	Legally	speaking,	that	family	can	bulldoze	through	any
decision	it	takes.	But	that	is	not	how	things	are	done	in	Volkswagen.	Like	other	large	German	companies,
it	has	the	two-tier	board	system,	where	workers	have	strong	representation.	Also,	the	company	is	20	per
cent	owned	by	the	government	–	or	more	precisely	the	state	(Land)	government	of	Lower-Saxony
(Niedersachsen).	As	a	result,	decisions	in	Volkswagen	are	reached	through	very	complicated	processes	of
bargaining,	involving	shareholders,	professional	managers,	workers	and	the	population	in	general
(through	government	ownership).
Volkswagen	is	an	extreme	example,	but	it	powerfully	illustrates	how	corporate	decisions	are	made	in	a
very	different	way	from	individual	ones.	We	simply	cannot	understand	the	modern	economy	without
having	at	least	some	understanding	of	the	complexity	involved	in	corporate	decisions.
The	cooperative	as	an	alternative	form	of	enterprise	ownership	and	management
Some	large	companies	are	cooperatives	owned	by	their	users	(consumers	or	savers),	employees	or
independent	smaller	business	units.
A	consumer	cooperative,	the	supermarket	chain	Coop,	is	the	second-largest	retailer	in	Switzerland.	Its
UK	counterpart,	Co-op,	is	the	country’s	fifth-biggest	supermarket	chain.	Consumer	cooperatives	allow
consumers	to	get	better	prices	by	pooling	their	purchasing	powers	and	negotiating	for	discounts	from
suppliers.	Of	course,	getting	discounts	from	suppliers	by	pooling	consumers	is	exactly	what	many
retailers,	from	Walmart	to	Groupon,	do.	But	the	difference	is	that,	other	things	being	equal,	cooperatives
can	pass	on	more	discounts	to	consumers,	as	they	do	not	have	shareholders	to	pay.
The	credit	union	is	a	cooperative	of	savers.	Nearly	200	million	people	around	the	world	are	members
of	credit	unions.	Some	of	the	world’s	biggest	banks,	such	as	the	Netherlands’	Rabobank	and	France’s
Credit	Agricole,	are	actually	credit	unions.	Both	of	them	started	as	savings	cooperatives	of	farmers.
There	are	two	types	of	producer	cooperatives:	worker	cooperatives,	owned	by	their	own	employees,
and	producer	cooperatives,	owned	by	independent	producers	that	agree	to	do	certain	things	together	by
pooling	their	resources.
Mondragon	Co-operative	Corporation	(MCC)	of	Spain	has	nearly	70,000	employee-partners	working
in	over	100	cooperatives	and	annual	sales	revenue	of	around	$19	billion	(as	of	2010).2	It	is	the	seventh-
biggest	company	in	Spain,	both	by	sales	and	employment.	It	is	also	the	largest	cooperative	in	the	world.
Another	famous	worker	cooperative	is	John	Lewis	Partnership	of	Britain,	the	owner	of	John	Lewis
department	stores	and	Waitrose	supermarkets	(the	UK’s	sixth-biggest	supermarket	chain).	It	is	of	similar
size	to	that	of	Mondragon	–	over	80,000	partners	and	a	turnover	of	around	$14	billion	(as	of	2011).
The	most	common	examples	of	cooperatives	of	independent	producers	selectively	working	together	are
dairy	farmers’	cooperatives,	in	which	farmers	own	their	cows	but	together	process	and	sell	the	milk	and
milk	products	(butter,	cheese,	etc.).	Arla	(the	Swedish-Danish	dairy	cooperative	that	produces	Lurpak
butter	and	Lactofree	milk),	Land	O’Lake	(the	Minnesota-based	American	dairy	farmer	cooperative)	and
Amul	(the	cooperative	of	Indian	dairy	farmers)	are	the	most	famous	examples.
One-person-one-vote:	rules	of	cooperative	decision-making
Being	membership	organizations,	cooperatives	make	decisions	based	on	the	one-person-one-vote	rule,
rather	than	on	the	one-dollar(share)-one-vote	rule	of	corporations.	This	results	in	decisions	that	are
impossible	to	imagine	in	shareholder-owned	corporations.
The	Mondragon	cooperative	group	is	famous	for	having	the	wage	rule	in	which	the	partner	in	charge	of
the	top	management	position	can	be	paid	only	three	to	nine	times	the	minimum	wage	paid	to	a	partner	who
does	a	front-line	job,	with	the	exact	ratio	being	decided	by	votes	among	the	partners	of	each	cooperative.
Compare	this	with	the	pay	packages	of	top	American	managers,	who	get	at	least	300–400	times	the
average	(not	minimum)	worker’s	wage.*	Some	cooperatives	even	rotate	jobs,	so	that	everyone	has
experiences	in	positions	at	different	levels	in	the	company.
Many	workers	do	not	make	decisions	as	individuals	any	more
In	modern	economies,	at	least	some	workers	do	not	make	economic	decisions	as	individuals	any	more.
Many	workers	are	organized	into	trade	unions,	or	labour	unions.	Allowing	workers	to	bargain	as	a
group,	rather	than	as	individuals	who	may	compete	against	each	other,	trade	unions	help	workers	extract
higher	wages	and	better	working	conditions	from	their	employers.3
In	some	countries,	trade	unions	are	considered	counter-	productive,	blocking	the	necessary	changes	in
technologies	and	work	organization.	In	others,	they	are	seen	as	natural	partners	in	any	business.	When
Volvo,	the	Swedish	vehicle	manufacturer,	bought	the	heavy	construction	equipment	arm	of	Samsung	in	the
aftermath	of	the	1997	Asian	financial	crisis,	it	is	said	to	have	asked	the	workers	to	set	up	a	trade	union
(Samsung	had	–	and	still	has	–	an	infamous	‘no-union’	policy).	The	Swedish	managers	didn’t	know	how
to	manage	a	company	without	a	trade	union	to	talk	to!
Like	cooperatives,	trade	unions	are	membership	organizations,	in	which	decisions	are	made	according
to	the	one-member-one-vote	rule.	These	decisions	by	enterprise-level	unions	are	usually	aggregated	by
national-level	unions,	such	as	South	Africa’s	COSATU	(Congress	of	South	African	Trade	Unions)	and	the
UK’s	TUC	(Trades	Union	Congress).	In	many	countries,	there	is	more	than	one	national-level	union,
usually	divided	by	political	and/or	religious	allegiances.	For	example,	South	Korea	has	two	national-
level	unions,	while	France	has	as	many	as	five.
In	some	countries,	enterprise	unions	are	also	organized	into	industry-level	unions.	The	most	famous	of
these	are	IG	Metall	(Industriegewerkschaft	Metall),	the	German	metal	workers’	union,	and	the	UAW
(United	Auto	Workers),	the	American	auto-workers’	union.	In	the	case	of	IG	Metall,	its	influence	stretches
over	the	metal-related	industries	(including	the	all-important	automobile	industry),	because,	as	the	most
powerful	union,	what	it	does	tends	to	set	the	trend	for	the	other	unions.
Some	trade	unions	even	play	a	part	in	national	policy-making
In	a	number	of	European	countries	–	Sweden,	Finland,	Norway,	Iceland,	Austria,	Germany,	Ireland	and
the	Netherlands	–	trade	unions	are	explicitly	recognized	as	key	partners	in	national-level	decision-
making.	In	those	countries,	they	are	involved	in	policy-making	not	just	in	‘obvious’	areas	like	wages,
working	conditions	and	training,	but	also	welfare	policy,	inflation	control	and	industrial	restructuring.
In	some	countries,	such	arrangements	exist	due	to	the	fact	that	a	very	high	proportion	of	workers	are
unionized.	Around	70	per	cent	of	workers	in	Iceland,	Finland	and	Sweden	belong	to	trade	unions	–	the
ratio	is	around	11	per	cent	in	the	US,	to	put	it	into	perspective.	However,	the	rate	of	unionization	(known
as	‘union	density’)	does	not	fully	explain	these	arrangements.	For	example,	more	workers	are	unionized	in
Italy	(around	35	per	cent)	or	Britain	(around	25	per	cent)	than	in	Germany	and	the	Netherlands	(both	less
than	20	per	cent),	but	the	Italian	and	the	British	unions	have	much	weaker	influence	on	national	policy-
making	than	do	their	German	or	Dutch	equivalents.	The	political	system	(e.g.,	how	strongly	political
parties	are	related	to	trade	unions)	and	political	culture	(e.g.,	consensual	or	confrontational)	matter	too.
The	government	is	the	single	most	important	economic	actor
In	all	countries	that	are	not	in	a	virtual	state	of	anarchy	(the	Democratic	Republic	of	Congo	and
Somalia	at	the	time	of	writing),	the	government	is	the	single	most	important	economic	actor.	We	will
discuss	what	it	does	in	greater	detail	in	Chapter	11,	so	let	me	just	give	you	the	big	picture	for	now.
In	most	countries,	the	government	is	by	far	the	single	largest	employer,	employing	anything	up	to	25	per
cent	of	the	national	workforce	in	some	cases.*	Its	expenditure	is	equivalent	to	anything	between	10	and	55
per	cent	of	national	output,	with	the	ratio	generally	higher	in	the	richer	countries	than	in	the	poorer	ones.
In	many	countries,	the	government	owns	and	runs	SOEs.	These	typically	produce	10	per	cent	of	national
output,	even	though	it	could	be	over	15	per	cent	in	countries	like	Singapore	and	Taiwan.	The	government
also	affects	how	other	economic	actors	behave	by	creating,	shutting	down	and	regulating	markets.
Respective	examples	are	the	creation	of	the	market	for	tradable	permits	for	pollution,	the	abolition	of
slavery	and	various	laws	regarding	working	hours	and	conditions.
How	the	government	makes	its	decisions:	compromises,	compromises	(and	lobbying)
The	process	of	government	decision-making	is	far	more	complicated	than	that	in	even	the	largest
corporations	with	the	most	complex	ownership	structures.	It	is	because	it	does	far	more	things	than	a
corporation	does,	while	having	to	accommodate	far	more	actors	with	much	more	diverse	goals.
When	making	decisions,	even	one-party	states	cannot	override	minority	interests	in	the	way	the
majority	can	in	corporate	decisions.	Except	in	the	most	extreme	cases,	such	as	Pol	Pot’s	Cambodia,
political	factions	exist,	and	the	competition	between	them	can	be	quite	intense,	as	it	is	in	today’s	China.
In	democracies,	the	decision-making	process	is	even	more	complex.	In	theory,	the	majority	party	can
impose	its	will	on	the	rest	of	society.	This	is	sometimes	done,	but	in	many	countries	the	parliamentary
majority	is	made	up	of	independent	parties	in	coalition,	so	compromises	have	to	be	made	all	the	time.
Anyone	who	has	watched	the	Danish	dramas	The	Killing	or	Borgen	would	appreciate	this	point.
Even	after	the	politicians	have	made	broad	decisions,	detailed	policies	have	to	be	drawn	up	and
implemented	by	civil	servants,	or	bureaucrats.	These	people	have	their	own	decision	rules,	which	are
hierarchical,	like	those	found	in	corporations,	rather	than	deliberative,	as	found	in	parliaments.
Politicians	and	bureaucrats	are	lobbied	by	all	sorts	of	groups	to	adopt	particular	policies.	There	are
single-cause	campaign	groups,	focusing	on	particular	issues,	such	as	the	environment.	Trade	unions	also
have	direct	influences	on	politicians	in	some	countries.	But	corporations	exert	the	greatest	influences.	In
some	countries,	such	as	the	US,	with	weak	restrictions	on	corporate	lobbying,	corporate	influences	are
enormous.	Jim	Hightower,	the	American	political	commentator,	was	certainly	exaggerating,	but	not	by
much,	when	he	said,	‘The	corporations	don’t	have	to	lobby	the	government	any	more.	They	are	the
government.’
International	organizations	with	money:	the	World	Bank,	the	IMF	and	others
Some	international	organizations	are	important	because	–	how	shall	I	put	it?	–	they	have	money.	The
World	Bank	and	other	‘regional’	multilateral	banks,	predominantly	owned	by	rich	country	governments,
make	loans	to	developing	countries.*	When	they	lend,	they	offer	more	favourable	terms	(lower	interest
rates,	longer	repayment	periods)	than	do	private-sector	banks.	The	International	Monetary	Fund	(IMF)
makes	large-scale	loans	on	a	short-term	basis	to	countries	in	financial	crises,	which	cannot	borrow	from
the	private	market.
The	World	Bank,	the	IMF	and	other	similar	multilateral	financial	institutions	demand	the	adoption	of
particular	economic	policies	of	their	borrowing	countries.	Admittedly,	all	lenders	attach	conditions	to
their	loans,	but	the	World	Bank	and	the	IMF	are	particularly	criticized	for	imposing	conditions	that	the
rich	countries	think	are	good,	rather	than	those	that	would	really	help	the	borrowing	countries.	This
happens	because	they	are	corporations	with	one-dollar-one-vote	rule.	The	majority	of	their	shares	are
owned	by	the	rich	countries,	so	they	get	to	decide	what	to	do.	Most	importantly,	the	US	has	de	facto	veto
power	in	the	Bank	and	the	Fund,	as	the	most	important	decisions	in	them	require	an	85	per	cent	majority,
and	the	US	happens	to	own	18	per	cent	of	shares.
International	organizations	that	set	rules:	the	WTO	and	the	BIS
Some	international	organizations	have	power	because	they	set	rules.4	One	example	is	the	Bank	for
International	Settlement	(BIS),	which	sets	international	rules	on	financial	regulations.	But	by	far	the	most
important	of	these	rule-setting	international	organizations	is	the	World	Trade	Organization	(WTO).
The	WTO	sets	rules	on	international	economic	interactions,	including	international	trade,	international
investment	and	even	the	cross-border	protection	of	intellectual	property	rights,	such	as	patents	and
copyrights.	It	is,	importantly,	the	only	international	organization	that	is	based	on	the	one-country-one-vote
rule.	Thus,	in	theory,	the	developing	countries,	which	have	the	numerical	advantage,	should	dictate	how
things	are	done	there.	In	practice,	unfortunately,	votes	are	almost	never	taken.	Rich	countries	use	all	kinds
of	informal	influences	(e.g.,	issuing	thinly	disguised	threats	to	reduce	foreign	aid	to	non-compliant	poor
countries)	to	avoid	voting.
Those	that	promote	ideas:	UN	agencies	and	the	ILO
Some	international	organizations	influence	our	economic	life	because	they	lend	legitimacy	to	certain
ideas.	Various	United	Nations	(UN)	organizations	belong	to	this	category.
The	UNIDO	(United	Nations	Industrial	Development	Organization),	for	example,	promotes	industrial
development.	The	UNDP	(United	Nations	Development	Programme)	promotes	poverty	reduction	on	a
global	scale,	and	the	ILO	(International	Labour	Organization)5	worker	rights.
These	organizations	promote	their	causes	mainly	by	offering	a	forum	for	public	discussion	on	issues	in
their	respective	areas	and	by	providing	some	technical	assistance	to	countries	that	wish	to	implement
their	ideas.	Sometimes	they	may	issue	declarations	and	conventions,	but	subscription	to	them	is	voluntary,
so	they	have	very	little	power.	For	example,	virtually	none	of	the	immigrant-receiving	nations	have	signed
up	to	the	ILO	convention	protecting	migrant	workers’	rights	(but	then	you	cannot	expect	turkeys	to	vote	for
Christmas,	as	they	say).
Not	being	backed	by	money	and	rule-setting	power,	the	causes	that	these	organizations	promote	are	far
less	strongly	promoted	than	the	agenda	of	the	IMF,	the	World	Bank	and	the	WTO.
Even	Individuals	Are	Not	What	They	Are	Supposed	to	Be
Individualist	economic	theories	misrepresent	the	reality	of	economic	decision-making	by	downplaying,	or
even	ignoring,	the	role	of	organizations.	Worse,	they	are	not	even	very	good	at	understanding	individuals.
The	divided	individual:	individuals	have	‘multiple	selves’
The	individualist	economists	emphasize	that	the	individual	is	the	smallest	irreducible	social	unit.	It	is
obviously	so	in	the	physical	sense.	But	philosophers,	psychologists	and	even	some	economists	have	long
debated	whether	the	individual	can	be	seen	as	an	entity	that	cannot	be	divided	up	further.
Individuals	don’t	need	to	suffer	multi-polar	disorder	to	possess	conflicting	preferences	within
themselves.	This	multiple-self	problem	is	widespread.	Even	though	the	term	may	be	unfamiliar,	it	is
something	that	most	of	us	have	experienced.
We	often	see	the	same	person	behaving	completely	differently	under	different	circumstances.	A	man
may	be	a	very	selfish	person	when	it	comes	to	sharing	domestic	work	with	his	wife	but	in	a	war	may	be
willing	to	sacrifice	his	life	for	his	comrades.	This	happens	because	people	have	multiple	roles	in	their
lives	–	a	husband	and	a	foot	soldier	in	the	above	example.	They	are	expected	to,	and	do,	act	differently	in
different	roles.
Sometimes	it	is	due	to	weakness	of	will	–	we	decide	to	do	something	in	the	future	but	fail	to	do	it	when
the	time	comes.	This	bothered	the	old	Greek	philosophers	sufficiently	that	they	even	invented	a	word	for
it	–	akrasia.	For	example,	we	decide	to	lead	a	healthier	lifestyle	but	then	see	our	willpower	crumble	in
front	of	a	tempting	dessert.	Anticipating	this,	we	may	devise	tricks	to	prevent	our	‘other	self’	from
asserting	itself	later,	like	Ulysses	asking	to	be	tied	to	his	ship’s	mast	in	order	not	to	be	seduced	by	the
Sirens.	You	declare	at	the	beginning	of	dinner	that	you	are	on	a	diet	and	won’t	be	having	a	dessert	to	be
prevented	from	ordering	one	later,	for	fear	of	losing	face	(and	you	can	always	have	a	few	compensatory
chocolate	cookies	when	you	go	back	home).
The	embedded	individual:	individuals	are	formed	by	their	societies
The	multiple-self	problem	shows	that	individuals	are	not	atoms	because	they	can	be	broken	down
further.	They	are	not	atoms	also	because	they	are	not	clearly	separable	from	other	individuals.
Economists	working	in	the	individualist	tradition	do	not	ask	where	individual	preferences	come	from.
They	treat	them	as	the	ultimate	data,	generated	from	within	‘sovereign’	individuals.	The	idea	is	best
summarized	in	the	maxim	‘De	gustibus	non	est	disputandum’	(‘Taste	is	not	a	matter	of	dispute’).
Yet	our	preferences	are	strongly	formed	by	our	social	environment	–	family,	neighbourhood,	schooling,
social	class	and	so	on.	Coming	from	different	backgrounds,	you	don’t	just	consume	different	things	but
you	get	to	want	different	things.	This	process	of	socialization	means	that	we	cannot	really	treat
individuals	as	atoms	separable	from	each	other.	Individuals	are	–	if	we	use	a	fancy	term	–	‘embedded’	in
their	societies.	If	individuals	are	products	of	society,	Margaret	Thatcher	was	seriously	wrong	when	she
famously	(or	infamously)	said,	‘There	is	no	such	thing	as	society.	There	are	individual	men	and	women,
and	there	are	families.’	There	cannot	be	such	a	thing	as	an	individual	without	society.
In	a	scene	from	the	1980s	cult	BBC	sci-fi	comedy	Red	Dwarf,	Dave	Lister,	the	protagonist	of	the	show,
who	is	a	Liverpudlian	working-class	slob,	guiltily	confesses	that	he’s	been	to	a	wine	bar	once,	as	if	he
had	committed	some	kind	of	crime	(but	then	some	of	his	friends	would	have	called	him	a	‘class	traitor’
for	that).	Some	young	people	from	poorer	classes	in	Britain,	even	after	decades	of	government	policy
encouraging	university	education	for	them,	still	believe	that	‘unis’	are	simply	not	for	them.	In	most
societies,	women	have	been	conditioned	into	believing	that	‘hard’	professions	such	as	science,
engineering,	law	and	economics	are	not	for	them.
It	is	an	enduring	theme	in	literature	and	cinema	–	My	Fair	Lady	(the	movie	version	of	George	Bernard
Shaw’s	play	Pygmalion),	Willy	Russell’s	Educating	Rita	(play	and	movie)	and	Marcel	Pagnol’s	La
Gloire	de	mon	père	(book	and	movie)	–	how	education,	and	the	resulting	exposure	to	different	lifestyles,
will	tear	you	away	from	your	own	people.	You	will	want	different	things	from	what	they	want	–	and	what
you	once	wanted	yourself.
Of	course,	people	have	free	will	and	can	–	and	do	–	make	choices	that	go	against	what	they	are
supposed	to	want	and	choose,	given	their	backgrounds,	as	Rita	did	by	choosing	to	do	a	university	degree
in	Educating	Rita.	But	our	environment	strongly	influences	who	we	are,	what	we	want	and	what	we
choose	to	do.	Individuals	are	products	of	their	societies.
The	impressionable	individual:	individuals	are	deliberately	manipulated	by	others
Our	preferences	are	not	just	shaped	by	our	environment	but	often	deliberately	manipulated	by	others
who	want	us	to	think	and	act	in	the	ways	they	want.	All	aspects	of	human	life	–	political	propaganda,
education,	religious	teachings,	the	mass	media	–	involve	such	manipulation	to	one	degree	or	another.
The	most	well-known	instance	is	advertising.	Some	economists,	following	the	works	of	George	Stigler,
a	leading	free-market	economist	of	the	1960s	and	the	1970s,	have	argued	that	advertising	is	basically
about	providing	information	about	the	existence,	prices	and	attributes	of	various	products,	rather	than
manipulation	of	preferences.	However,	most	economists	agree	with	John	Kenneth	Galbraith’s	seminal
1958	book	The	Affluent	Society	that	much	of	advertising	is	about	making	potential	consumers	want	the
product	more	eagerly	than	they	would	otherwise	do	–	or	even	want	things	that	they	never	knew	they
needed.
Advertisements	may	associate	a	product	with	a	celebrity,	a	sport	team	(which	company	logos	does	your
favourite	football	or	baseball	team	have	on	its	uniform?)	or	with	a	fancy	lifestyle.	They	may	use	memory
triggers,	which	work	on	our	subconscious.	They	may	be	aired	at	times	when	viewers	are	most	susceptible
(that’s	why	you	get	TV	advertisements	for	snacks	around	9–10	p.m.).	And	not	to	forget	product
placements	in	movies,	savagely	satirized	in	the	film	The	Truman	Show:	I	still	remember	Mococoa,	made
with	‘all	natural	cocoa	beans	from	the	upper	slopes	of	Mount	Nicaragua’.
Individual	preferences	are	also	manipulated	at	a	more	fundamental	level	through	the	propagation	of
free-market	ideologies	by	those	want	constraints	on	their	profit-seeking	minimized	(so	we’re	back	to	the
politics	of	ideas	again).	Corporations	and	rich	individuals	generously	finance	think	tanks	that	produce
pro-market	ideas,	such	as	the	Heritage	Foundation	in	the	US	and	the	Institute	of	Economic	Affairs	in	the
UK.	They	donate	campaign	funds	to	pro-market	political	parties	and	politicians.	Some	big	companies	use
their	advertising	spending	to	favour	business-friendly	media.
Once	poor	people	are	persuaded	that	their	poverty	is	their	own	fault,	that	whoever	has	made	a	lot	of
money	must	deserve	it	and	that	they	too	could	become	rich	if	they	tried	hard	enough,	life	becomes	easier
for	the	rich.	The	poor,	often	against	their	own	interests,	begin	to	demand	fewer	redistributive	taxes,	less
welfare	spending,	less	regulation	on	business	and	fewer	worker	rights.
Individual	preferences	–	not	just	of	consumers	but	also	of	tax-payers,	workers	and	voters	–	can	be,	and
often	are,	deliberately	manipulated.	Individuals	are	not	the	‘sovereign’	entities	that	they	are	portrayed	as
in	individualist	economic	theories.
The	complicated	individual:	individuals	are	not	just	selfish
Individualist	economic	theories	assume	that	individuals	are	selfish.	When	combined	with	the
assumption	of	rationality,	the	conclusion	is	that	we	should	let	individuals	do	as	they	please;	they	know
what	is	best	for	themselves	and	how	to	achieve	their	goals.
Economists,	philosophers,	psychologists	and	other	social	scientists	have	for	centuries	questioned	the
assumption	of	self-seeking	individuals.	The	literature	is	huge,	and	many	points	are	quite	obscure,	even	if
they	are	theoretically	important.	Let’s	stick	to	the	main	points.
Self-seeking	itself	is	too	simplistically	defined,	with	the	implicit	assumption	that	individuals	are
incapable	of	recognizing	long-term,	systemic	consequences	of	their	actions.	Some	European	capitalists	in
the	nineteenth	century	argued	for	a	ban	on	child	labour,	despite	the	fact	that	such	regulation	would	reduce
their	profits.	They	understood	that	continued	exploitation	of	children	without	education	would	lower	the
quality	of	the	workforce,	harming	all	capitalists,	including	themselves,	in	the	long	run.	In	other	words,
people	can,	and	do,	pursue	enlightened	self-interest.
Sometimes	we	are	just	generous.	People	care	about	other	people	and	act	against	their	self-interest	to
help	others.	Many	people	give	to	charities,	volunteer	for	charitable	activities	and	help	strangers	in
trouble.	A	fireman	enters	a	burning	house	to	save	an	old	lady	trapped	inside	and	a	passer-by	jumps	into
rough	sea	to	save	drowning	children,	even	knowing	that	they	themselves	may	be	killed	in	the	process.	The
evidence	is	endless.	Only	those	who	are	blinded	by	a	belief	in	the	model	of	the	self-seeking	individual
would	try	to	ignore	it.6
Human	beings	are	complicated.	Yes,	most	people	are	self-seeking	much	of	the	time,	but	they	are	also
moved	by	patriotism,	class	solidarity,	altruism,	sense	of	fairness	(or	justice),	honesty,	commitment	to	an
ideology,	sense	of	duty,	vicariousness,	friendship,	love,	pursuit	of	beauty,	idle	curiosity	and	much	else
besides.	The	very	fact	that	there	are	so	many	different	words	describing	human	motives	is	testimony	to	the
fact	that	we	are	complicated	creatures.
The	bumbling	individual:	individuals	are	not	very	rational
Individualist	economic	theories	assume	individuals	to	be	rational	–	that	is,	they	know	all	possible
states	of	the	world	in	the	future,	make	complicated	calculations	about	the	likelihood	of	each	of	these	states
and	exactly	know	their	preferences	over	them,	thereby	choosing	the	best	possible	course	of	action	on	each
and	every	decision	occasion.	Once	again,	the	implication	is	that	we	should	let	people	be,	because	‘they
know	what	they	are	doing’.
The	individualist	economic	model	assumes	the	kind	of	rationality	that	no	one	possesses	–	Herbert
Simon	called	it	‘Olympian	rationality’	or	‘hyper-rationality’.	The	standard	defence	is	that	it	does	not
matter	whether	a	theory’s	underlying	assumptions	are	realistic	or	not,	so	long	as	the	model	predicts	events
accurately.	This	kind	of	defence	rings	hollow	these	days,	when	an	economic	theory	assuming	hyper-
rationality,	known	as	the	Efficient	Market	Hypothesis	(EMH),	played	a	key	role	in	the	making	of	the	2008
global	financial	crisis	by	making	policy-makers	believe	that	financial	markets	needed	no	regulation.
The	problem	is,	simply	put,	that	human	beings	are	not	very	rational	–	or	that	they	possess	only	bounded
rationality.*	The	list	of	non-rational	behaviour	is	endless.	We	are	too	easily	swayed	by	instincts	and
emotion	in	our	decisions	–	wishful	thinking,	panic,	herd	instinct	and	what	not.	Our	decisions	are	heavily
affected	by	the	‘framing’	of	the	question	when	they	shouldn’t,	in	the	sense	that	we	may	make	different
decisions	about	essentially	the	same	problem,	depending	on	the	way	it	is	presented.	And	we	tend	to	over-
react	to	new	information	and	under-react	to	existing	information;	this	is	frequently	observed	in	the
financial	market.	We	normally	operate	with	an	intuitive,	heuristic	(short-cut)	system	of	thinking,	which
results	in	poor	logical	thinking.	Above	all,	we	are	over-confident	about	our	own	rationality.
Concluding	Remarks:	Only	Imperfect	Individuals	Can	Make	Real	Choices
A	paradoxical	result	of	conceptualizing	individuals	as	highly	imperfect	beings	–	with	limited	rationality,
complex	and	conflicting	motives,	gullibility,	social	conditioning	and	even	internal	contradictions	–	is	that
it	actually	makes	individuals	count	more,	rather	than	less.
It	is	exactly	because	we	admit	that	individuals	are	products	of	society	that	we	can	appreciate	more	the
free	will	of	those	who	make	choices	that	go	against	social	conventions,	prevailing	ideologies	or	their
class	backgrounds.	When	we	accept	that	human	rationality	is	limited,	we	get	to	appreciate	more	the
initiatives	exercised	by	entrepreneurs	when	they	embark	on	an	‘irrational’	venture	that	everyone	else
thinks	is	going	to	fail	(which,	when	successful,	is	called	an	innovation).	In	other	words,	only	when	we
admit	the	imperfect	nature	of	human	beings	can	we	talk	about	‘real’	choices	–	not	the	empty	choices	that
people	are	destined	to	make	in	the	world	of	perfect	individuals,	in	which	they	always	know	which	is	the
best	course	of	action.
Emphasizing	the	importance	of	‘real’	choices	is	not	to	suggest	that	we	can	make	any	choice	we	like.
Self-help	books	may	tell	you	that	you	can	do	or	become	anything	if	you	choose	to.	But	the	options	that
people	can	choose	from	(or	their	choice	sets)	are	usually	severely	limited.	This	could	be	because	of	the
meagreness	of	the	resources	they	command;	as	Karl	Marx	dramatically	put	it,	the	workers	of	early
capitalism	had	only	the	choice	between	working	eighty	hours	a	week	in	harsh	conditions	and	starving	to
death,	because	they	had	no	independent	means	to	support	themselves.	The	limited	choice	set	may	also	be,
as	I	argued	above,	because	we	have	been	taught	to	limit	the	range	of	what	we	want	and	what	we	think	may
be	possible	through	the	socialization	process	and	deliberate	manipulation	of	our	preferences.
Like	all	great	novels	and	movies,	the	real	economic	world	is	populated	by	complex	and	flawed
characters,	both	individuals	and	organizations.	Theorizing	about	them	(or	about	anything),	of	course,	has
to	involve	some	degrees	of	generalization	and	simplification,	but	the	dominant	economic	theories	go	too
far	in	simplifying	things.
Only	when	we	take	into	account	the	multi-faceted	and	limited	nature	of	individuals	while	recognizing
the	importance	of	large	organizations	with	complex	structure	and	internal	decision	mechanisms	will	we
be	able	to	build	theories	that	allow	us	to	understand	the	complexity	of	choices	in	real-world	economies.
Further	Reading
G.	AKERLOF	AND	R.	SHILLER
Animal	Spirits:	How	Human	Psychology	Drives	the	Economy	and	Why	It	Matters	for	Global
Capitalism	(Princeton:	Princeton	University	Press,	2009).
J.	DAVIS
The	Theory	of	the	Individual	in	Economics:	Identity	and	Value	(London:	Routledge,	2003).
B.	FREY
Not	Just	For	the	Money:	An	Economic	Theory	of	Personal	Motivation	(Cheltenham:	Edward	Elgar,
1997).
J.	K.	GALBRAITH
The	New	Industrial	State	(London:	Deutsch,	1972).
F.	VON	HAYEK
Individualism	and	Economic	Order	(London:	Routledge	and	Kegan	Paul,	1976).
D.	KAHNEMANN
Thinking,	Fast	and	Slow	(London:	Penguin,	2012).
H.	SIMON
Reason	in	Human	Affairs	(Oxford:	Basil	Blackwell,	1983).
P.	UBEL
Free	Market	Madness:	Why	Human	Nature	Is	at	Odds	with	Economics	–	and	Why	It	Matters	(Boston,
MA:	Harvard	Business	School	Press,	2009).