Whereas macroeconomics examines decision-making by governments, microeconomics takes a more personal perspective. Why do individuals and groups do what they do? It is a question relevant to practically every decision made and seen in this light everything actually amounts to economics. Dr Giorgia Romagnoli is Assistant Professor of Microeconomics at UvA’s Amsterdam School of Economics (ASE). One of her research areas is the sharp erosion of moral values caused by markets and the role played by replacement logic.
Linguistically speaking, ‘macro’ and ‘micro’ differ by just a single letter but there is a huge difference between the 2 branches of economics ‘Of course, micro analysis departs from a much smaller scale but the 2 approaches are interdependent,’ says Dr Romagnoli. ‘You can’t see economic decision-making at the national level separately from decisions taken at the individual level.’
Romagnoli explains that, in microeconomics, the concept of ‘economics’ is interpreted very broadly. ‘Basically, every decision that impacts the real world can be analysed as an economic decision.’ Examples span from attitudes towards health and vaccines through dating and marriage to ethical and religious views. ‘These subjects appeal to economists since they relate to important outcomes such as your educational choices, your carbon footprint, whether you’ll take a job and what kind of job, or how many kids you’ll have, if any.’
With such broad research horizons, what separates a microeconomist from a psychologist, an anthropologist or a sociologist? The distinction is mostly methodological in nature: microeconomics is unique in framing decisions as stemming from optimal decision-making, a rational balancing act in the face of incentives and constraints. ‘Take online dating. While a psychologist may focus on how it affects our emotions, a microeconomist studies it as a market. How many partners are available for a given individual? Will more education, friends or money make you more appealing? And does this differ by gender?’
Romagnoli disagrees with the notion that microeconomics turns more sentimental issues into economic ones. ‘We don’t disregard true love and other sentiments. In science, we always need to narrow our focus and economists specialise in the effects of external incentives and constraints. These are the most useful to policy makers because they can be influenced by policies.’
We could be trapped in an equilibrium where everybody trades because everybody trades. But it doesn’t necessarily make us happier.
An interesting study by Romagnoli addresses the moral erosion caused by markets and the role played by the logic of replacement. Romagnoli elaborates: ‘Replacement logic is the justification of immoral actions that harm other parties by pointing to other people and saying: ‘If I don’t do it then they will do it instead’.’ As an example, former UK prime minister Tony Blair used this reasoning to defend his country’s arms trade.
One of Romagnoli’s friends used the same line of reasoning to justify his flying behaviour. ‘There’s a limited amount of oil. As long as it’s available, I might as well consume it myself instead of leaving it for others.’ This is a dangerous argument according to Romagnoli. We could all be engaged in behaviour that we morally object to purely because others behave that way too, in a self-fulfilling cycle.
The study by Romagnoli and her co-authors, Andreas Ziegler and Theo Offerman, shows that moral values in market-based decision-making are eroding rapidly. ‘We created a market setting where participants could trade and allocate profits between themselves. We then added a moral dimension. Every time 2 participants engaged in a transaction, a unit of donation would be discontinued. These donations were used to supply enough vaccinations to fully protect 2 children against measles.’ The experiment tried to uncover the factors that, in the eyes of participants, would cause the moral costs of trading to outweigh the benefits.
It was found that the gains from trade were initially high and progressively decreased to mere cents. Surprisingly, when replacement logic was available (i.e. multiple traders could seize the same trade opportunity), trade did not stop. ‘Participants kept trading until the end. At that point, there was only 20 cents left to split between 2 individuals. Still, the vast majority of subjects - more than 80% - were interested in such tiny gains even though it meant that donations were cancelled.’
Importantly, in a setting where people made decisions individually (so without the replacement logic argument), participants did stop. They did so as soon as they felt that benefits no longer outweighed the costs of discontinuing vaccination. The average profit at which people stopped was € 1.17.
The difference is statistically significant and substantial: morals in a market with replacement deteriorated to 1/10th or less of what they were in individual decision-making.
The large volumes of immoral or unsustainable trade in the real world could stem from people applying replacement logic on a massive scale. ‘We could be trapped in an equilibrium where everybody trades because everybody trades. But it doesn’t necessarily make us happier.’ The regulation of markets (e.g. trading quotas) could help. Romagnoli expects regulation to be a topic of future research. ‘It’s promising especially if combined with more awareness of the corrupting forces at play. But it implies limitations to our individual freedom. Am I prepared to accept restrictions to my freedom if it means less immoral trade will take place overall? It’s a question that affects a whole range of major social issues.’
One such issue is the climate crisis. ‘This is a danger to us all. To fight it successfully, we’ll have to limit people’s freedom. But when can we impose restrictive measures and when do they go too far? Freedom is a fundamental principle in Western societies. Limiting it comes with backlashes and other costs. How we can best combine these aspects is an extremely important area of future research.’