Towards Dual Interest Theory in Metaeconomics

Introduction

Traditional microeconomics generally presumes fully allocable goods and allocable inputs, and thus both consumption and production, demand and supply, are separable and independent. Microeconomics assumes that individuals behave in pursuit of self-interest. Microeconomics (except for game theory allowing for strategic interdependency) also presumes that each person is generally independent of other persons and of natural systems on Spaceship Earth—we refer to this as Single Interest Theory (SIT).

The main problem with SIT is that it assumes no walking-in-the-shoes-of-others, no empathising. SIT sees only the self-interest set of indifference curves I_G (Figure 1) for bundles of the socially beneficial good 1 (quantity q₁) and the selfish good 2 (q₂), for example, recycled versus regular paper; plane tickets with a carbon offset fee versus plane tickets without; green versus conventional electricity. Given the budget constraint R⁰R⁰, self-interest is maximised at point A. As the budget changes, ceteris paribus these optimal points produce an expansion path 0G.

Dual Interest Theory (DIT) assumes that an individual is motivated by two interests: ego-based self-interest I_G and other-interest (I_M). Other-interest is empathy-based; it is a shared interest which is internalised within the own-self. Given the budget constraint R⁰R⁰, other-interest is maximised at point C (Figure 1). Expansion path 0M represents optimal other-interest if the budget changes. An individual can choose to maximise self-interest following path 0G or shared other-interest on path 0M. Thus, by optimising one interest, the person sacrifices the other. DIT postulates that one will be balancing both interests by choosing 0Z, called the own-interest path.

OPEN IN VIEWER Figure 1.

Isoquants for Non-allocable Inputs (ϰ₁ϰ₂) or Indifference Curves for Non-allocable Goods/Outcomes (q₁ q₂).

DIT should be differentiated from DMT, Dual Motive Theory (Cory, 2006a, 2006b), with which it has some common ground. DIT expanded the role of empathy by focusing on empathy-based ethics forming the core of the shared other-interest (Sheeder & Lynne, 2011). This understanding of ethics echoes in the argument by Dietrich and Rowen (2005) that individuals behave ethically both because they value ethics in itself and because it is in their own-interest to do so. As will be discussed later, DIT should also be differentiated from other frameworks focusing on interdependent utility such as social preferences and social value orientation (SVO) (Murphy and Ackermann, 2011; Murphy et al., 2011) as DIT acknowledges the impossibility of knowing the utility of another person.

Another important feature of DIT is the role of self-control. DIT recognises that people are inherently challenged in finding the best balance in the self- and other-interest, that is, the location of the path 0Z (Adam Smith referred to this as the problem of self-command). People tend to slip back to the more hedonistic, primal self-interest-only path. However, being mindful of the other-interest (the moral dimension and community, the ethics, the conscience and the Spaceship system) is essential to maximising the own-interest. For instance, donors making charitable contributions have been shown to give special importance to their relationship with others and community (Gandullia et al., 2021).

The concept of own-interest requires an open mindset and may feel uncomfortable for some who have been taught and are used to operating only in the SIT domain; in that, DIT focuses on the more nuanced notion of own-interest rather than on self-interest. In the following sections, we will present DIT in more detail and provide its applications to a variety of social phenomena. For the mathematical metaeconomics, see Lynne (2006 a, b) and Appendix in Lynne (2020).

Metaeconomics of a Consumer Problem

Edgeworth was the first to propose the indifference curve (Lenfant, 2012, p. 117), which became a core construct in SIT used to explain the origin of demand. According to Sen (1977, p. 318), Edgeworth considered a person an impure egoist and that ‘…between the claims of oneself and the claims of all lie the claims of a variety of groups - for example, families, friends, local communities, peer groups, and economic and social classes’. Lynne (1995, 1999) was apparently the first to represent such claims as the empathy-based other-interest, which led to the graphical representation of the DIT using two overlapping sets of indifference curves (Figure 1). Initially, the notion of non-allocable goods was framed as a dual-utility theory following Etzioni (1986, 1988). Over time, influenced by empirical testing, it was changed to focus on dual interest (Lynne et al., 2016) rather than dual utility (i.e., separable pleasure and moral utility).

DIT is more accurate than a dual utility model because it recognises jointness. It is also more flexible because the payoff can be framed in other terms such as happiness and peace of mind. DIT also accommodates such frames as the Kantian imperative (White, 2006), focused on the tension between a joint and non-separable inclination (0G) and duty (0M): sufficient self-control ensures finding and staying on the balanced (Kantian) path 0Z. The set of indifference curves I_G represents the virtue of prudence; the set I_M is based on empathy and represents the virtue of temperance as well as other virtues such as courage, justice, faith, hope and love. Furthermore, DIT aligns well with the neuroeconomics findings, pointing at two tendencies (selfish and empathetic), which are joint and non-separable, within different brain segments (Singer, 2009).

Marglin (2008) argued that using SIT Undermines Community. DIT, on the other hand, brings community back, allowing for various constituencies (immediate family, extended family, colleagues, clubs, sport teams, labour unions, religious affiliations, political parties, state and nation) to be incorporated in the other-interest considerations. However, when considering the influence of community in DIT, it is important to keep in mind that the other-interest reflected in community is not the same as other-regarding preferences and the other-interest does not imply interdependent utility. First, other-regarding in DIT only goes to the level of mindfulness: a person must become mindful of the other, as the starting point for empathy/walking-in-the-shoes-of-others. This regard is not other-directed, but it rather represents what one shares with the other. It is not an other-regarding preference: it is an own-preference in the domain of shared other (internalised)-interest. DIT preserves the individualism of SIT. Second, other-interest in DIT does not mean interdependent utility/interest as DIT recognises the empirical evidence that knowing the exact utility derived by another person is patently impossible. This differentiates DIT from other frameworks examining interdependent decision behaviour such as social preferences, other-regarding preferences and SVO. While SVO (Murphy and Ackermann, 2011; Murphy et al., 2011) provides a way to classify the individual motivations regarding resource allocation as fundamental (such as individualistic, prosocial, competitive and altruistic) and secondary (such as sadistic, masochistic, sadomasochistic and martyrdom), DIT postulates that regardless of how the payoffs are allocated, we cannot know whether they are truly advancing the interest of another person and the best one can do is empathise, and join in sentiment with, through projection of own-self into the situation of the other. ‘We sympathize even with the dead’ (Smith, 1759/1790, loc 407)’. So, we may well empathise with someone killed in a robbery, resulting in tempering our self-interest. Because of empathy with the person killed, a person supports a larger police budget through higher taxes and sacrifices a bit of self-interest, even though the likelihood of being killed in a robbery is extremely small, that is, the cost is greater than the expected benefit in the domain of self-interest. The gain is in shared other-interest within the own-self, with an overall gain in own-interest.

To illustrate the consumer problem with non-allocable goods, let’s use recycling. Good 1 has recycled content, while good 2 is produced only from new resources. The consumer buys a bundle q₁ and q₂ of these goods. Each good gives a simultaneous payoff in both the domain of self-interest I_G and other-interest I_M. Under the SIT solution, given budget constraint R⁰R⁰, the consumer maximises self-interest only at point A (Figure 1) with a high payoff in self-interest on the indifference curve I_G³ and a small payoff in the other-interest on the indifference curve I_M¹. The consumer can also maximise other-interest at point C where other-interest on the indifference curve I_M³ is very high, while the payoff in self-interest on the curve I_G¹ is very low. DIT argues that many, if not most, consumers would not be happy at point A as it mostly ignores the conscience or ‘the impartial spectator’ as Adam Smith described it. Similarly, most consumers would not be happy at point C where self-interest is mostly ignored.

DIT posits that consumers tend to balance both interests by choosing point B with moderate levels of satisfying self- and other-interest on I_G² and I_M². In effect, DIT points to maximising the broadened own-interest, made possible only by sacrificing a bit of each interest (a new meaning of altruism, which is now more than just sacrifice in self-interest; see Lynne, 2020, p. 221). As Kalinowski et al. (2006) empirically demonstrated, people sacrifice self-interest payoff to recycle and/or buy recycled content goods, and these behaviours increase as consumers identify more fully with the shared interest in recycling. Ultimately, this is about finding balance in the joint consumption of selfish and socially beneficial goods.

Metaeconomics of a Producer Problem

Ragnar Frisch was one of the first to use an isoquant (Lloyd, 2012). Frisch (1965) was the first to insert overlapping isoquants into the same space to represent non-allocable inputs, as in the wool and mutton problem. A producer/rancher has very limited control over how the grain and hay inputs are allocated between wool and mutton, internally, by the sheep. As a result, wool and mutton are inextricably intertwined—joint and non-separable. Intriguingly, the Frisch framing of jointness did not make way into mainstream microeconomics. However, this idea of jointness was developed into a foundational principle in DIT. On a larger scale, non-allocable inputs reflect the thermodynamic reality: everything is internal in a non-allocable input system (Lynne, 2020, Ch. 12). The economy is internal to the Spaceship, with limited control over it, and nothing is external except energy from the Sun, a fusion reactor on the way to maximum entropy, which also ensures nonallocability. Initially, DIT was developed for a producer-farmer who is facing a conservation choice and uses two types of inputs: industrial inputs (e.g., seed, fuel, fertiliser and land) and conservation technology (conservation tillage, cover crops and nutrient management, etc.). These inputs are non-allocable in producing food (private) and natural resource (public) products. The question is what motivates farmers to choose a higher or lower conservation level.

The research question originated in the US soil conservation effort started in the 1930s, with more concerted effort of data collection and empirical testing since the late-1980s (Lynne, 2020, Ch. 8; Lynne et al., 2016). The initial findings showed that SIT framing was explaining <20% of the variation in farmer conservation choices (Lynne et al., 1988). This led to the development of DIT raising the explanatory power to >60% of the variation (Lynne et al., 2016), confirming that conservation is driven not only by self-interest but also by empathy-based (shared) other-interest, working to temper the more primal ego-based self-interest of conservation farmers.

Under DIT, non-allocable inputs 1 and 2 (in quantities ϰ₁ and ϰ₂) are used to produce private good—corn for the Market on path 0G. These inputs simultaneously produce wildlife (and other public goods) for use by everyone, including deer hunters and bird watchers. Said public goods also serve the other-interest of the farmers on path 0M (Figure 1). By choosing to pursue self-interest only (isoquant I_G³) and facing the capital constraint R⁰R⁰, the farmers maximise profit at point A resulting in a large quantity of corn produced for the Market and a very small amount of wildlife (small payoff in other-interest).

In contrast, if the farmers pursue other-interest (isoquant I_M³ given the capital constraint R⁰R⁰), they will end up at point C with plentiful wildlife in the surrounding area (e.g., deer, birds, bees) for the Other (non-market) Forums and a small amount of corn for the Market Forum. There would be little to no monetary payoff for the farmers at point C, as deer hunting and bird watching in the region do not generate income for farmers. So, what will farmers do? It depends upon the extent to which the farmers join in empathy with others and becomes mindful of the wildlife. It depends whether they start seeing corn and wildlife as being internal to the same process.

Farmers’ choice is influenced by the larger context provided by the Community (including the farmers) and the Government charged with representing the value V of wildlife, as demonstrated in Figure 2. Meta-preferences for the private (corn) and public (wildlife) products are represented in the value V isocurves, on a higher plane of interest, generally evolving in an Other Forum beyond the Market Forum. The possibilities frontier R⁰R⁰ in Figure 2 is derived from moving along the capital constraint R⁰R⁰ in Figure 1. Areas outside of paths 0G and 0M (Figure 1) are irrational, as depicted by the positive slopes on the R⁰R⁰ possibilities frontier (Figure 2). It is irrational to not produce at least some of both the private and public products, such as at points A and C.

If the value V of wildlife is viewed as zero, then the V⁰ of I_{M =} 0 horizontal line is the driving force in the balance of interests on the higher plane, pointing to point A in both Figures 1 and 2 with lots of corn and little wildlife. If corn is not highly valued relative to wildlife, as in a wildlife preservation frame, then the favoured V⁰ of I_{G =} 0 curve is the driving force at point C: lots of wildlife and little corn.

OPEN IN VIEWER Figure 2.

Possibility RR and Value V Curves for Products, Goods and/or Outcomes q₁ q₂ Reflecting Balance in Self- and Other-interest.

DIT allows for incommensurability: the value is not necessarily fully represented in price as not everything can or should be commodified and traded. As such, DIT handles mixed cases. For example, privately owned farmland is used to produce corn, with the price of corn evolving in the corn Market. The private property right is attenuated with the public property right in wildlife, with wildlife having value. In this situation, economic efficiency implies that everyone’s needs and wants are met in balance (i.e., farmers and consumers who want more corn are in unison with people who want more wildlife) on some path 0Z, which is determined by the interplay of Market and Government, reflecting the price P and value V. Metaeconomics indicates a legitimate and essential role for Government which is broadly and inclusively representing the entire Community.

DIT argues that it is economically irrational to not consider both interests in the zone between the two paths 0G and 0M. Maximising self-interest on path 0G, as SIT suggests, is not rational nor is it efficient unless the value of wildlife is zero for the person. Moreover, as ‘mainstream neoclassical economics does not go well with the challenge of sustainability’ Söderbaum (2008, p. 149), SIT’s choice of point A is not sustainable in the long run. DIT’s choice of point B and balancing self- and other-interest on path 0Z is more environmentally sustainable and, as such, more economically rational. However, even though most people express a shared other-interest in having some wildlife travelling (and addressing other sustainability issues) with the farmers and food consumers on the Spaceship Earth, there can be obstacles for that due to the outsized influence of the Market drowning the Other Forum’s influence. This necessitates a more prominent role for the Community and the Government representing it. Metaeconomics frames Government programmes, for example, payments to farmers using tax dollars, as essential to ensuring both food and wildlife are produced at the efficient and socially optimal level.

Through payments/cost-sharing (in the US provided by the Farm Service Agency) and technical support for conservation plans (by the US Natural Resource Conservation Service), community can signal to the farmers the value of public goods and shift their production away from 0G. If the payment for wildlife habitat/production is high enough, overall profits coming from the Market Price and Government Payments could be identical to those on path 0Z. While Government can potentially make the farmer’s profit at point B as high as at point A, it will not be needed as at point B the farmer will be receiving some payoff from the other (shared with the other)-interest which will be compensating for some of the loss in self-interest.

An alternative to the payments/cost-sharing is having the Government in direct control, requiring wildlife production without any financial compensation. In that case, farming profit would be considerably less, with hunters and bird watchers having a free ride while the farmers pay all the cost. It is also possible for the Government to nudge farmers to become mindful of the value shared with others. If nudging is done following the principles of libertarian paternalism (Thaler & Sunstein, 2021), the shared other-interest will be represented in the paternalism with influence on the libertarian self-interest.

Finally, the farmers could see wildlife as part of the aesthetics, as do passersby, the environment living on the farm. Acting on shared gains with the passersby, in the other-interest, the farmers might voluntarily move over from path 0G to path 0Z sacrificing a bit of corn production, while increasing wildlife production. The farmers may find a more fulfilling and balanced life at point B rather than point A. In our research on conservation practices, we often found farmers being disappointed because ‘the Market made me do it’, that is, the Market sends only price signals for corn and sends no value signals about wildlife.

In defending SIT, some economists would argue that Markets are inherently moral, inherently always doing the right thing (Whyte, 2019). For instance, consider a moral and ethical producer ‘swallowing’ path 0M as part of their self-interest, now forming a quasi-path 0Z. This quasi-0Z appears to be a self-interest path, albeit now a virtuous one. Frisch (1965, p. 273) refers to it as a ‘complete coupling’. DIT rejects this idea as it is misleading to hide the moral dimension in production decisions, pretending that this is the result of the invisible hand of the Market as in reality this is almost never the case, and following the Market signals leads to the destruction of wildlife and the unsustainability of the Spaceship. Metaeconomics suggests using the visible hand and keeping path 0M considerations visible in Other Forums which work to temper the Market Forum. ¹

Adam Smith and Dual Interest Theory

DIT is a formal way of representing the long-understood reality of internal tension in people. The tension has been recognised going at least back to Plato (Hayes & Lynne, 2004): the stallion (ego) tempered by the mare (empathy) with the driver needing to take self-control over the team, keeping the chariot on the best path of balance in ego and empathy. The need to temper the ego-sourced, arrogant self-love of the stallion is prominent in the writing of moral philosophers, for economists like Adam Smith (Smith, 1759/1790, 1776/1789). The frame of dual interest, and the need to take self-control and find balance, is prominent in Smith’ two books considered jointly.

Some scholars of Smith, however, seemed to interpret it differently: the German Historical School is concerned with ‘das Adam Smith problem’ and, more recently, the ‘two faces of Adam Smith’ problem (Smith, 1998; Smith & Wilson, 2019). In the Wealth of Nations book, Adam Smith made clear how making wealth is driven by self-interest (i.e., self-love):

…man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them.…Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. 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. (Smith, 1776/1789, loc 239–251)

This quote has formed the basis for SIT, suggesting that Smith is focused exclusively on making wealth in a kind of free to choose to do whatever the ego-based self-interest wants, ignoring the admonitions of the Theory of Moral Sentiments where he clarified what is meant by own-interest:

Though it may be true, therefore, that every individual, in his own breast, naturally prefers himself to all mankind, yet he dares not look mankind in the face, and avow that he acts according to this principle. He feels that in this preference they can never go along with him, … If he would act so as that the impartial spectator may enter into the principles of his conduct, which is what of all things he has the greatest desire to do, he must, upon this, as upon all other occasions, humble the arrogance of his self-love, and bring it down to something which other men can go along with. (Smith, 1759/1790, loc 1714–1727)

So, it is clear that while the creation of wealth was driven by the arrogance of self-love/self-interest, it had to be tempered to pursue a good—moral and ethical, and efficient—own-interest. And, it was not about benevolence, but it was about the sentiments—empathy-based ethics had to bring the self-interest down to ‘something which (the other) can go along with’ which is the own-interest. The production and consumption of meat, beer, and bread were not just about self-interest: it was to be tempered by ethical reflection leading to the shared other-interest, which was then to be applied with self-control/command to temper the self-interest onto the path 0Z to maximise the own-interest. So, Adam Smith had only one face (Smith & Wilson, 2019), a joint face with self- and other-interest in that one face (Lynne, 2020). This interpretation is also in line with Etzioni (1988) and Roberts (2014) that Smith not only understood what drove the making of wealth but the need to temper it and ‘in short, Adam Smith’s world is not inhabited by dispassionate rational purely self-interested agents, but rather by multidimensional and realistic human beings’ (Ashraf et al., 2005, p. 142).

It is not the Market per se that is moral (Whyte, 2019); rather, the Market must be tempered by something outside, in particular, everyone reflecting on what is shared while at the station of the impartial spectator. Often, it is a representative—the Government, trusted and operating on principles of Democracy for all, is charged with representing the shared-with-the-other-interest.

DIT proposes to revive original ideas in Adam Smith, building on recent findings in thermodynamics and behavioural science. And, while economists removed explicit consideration of ethics to build a mathematical economics (see Becchio, 2009), DIT demonstrates that ethics can be brought back into the formal model as it was argued by Dietrich and Rowen (2005).

Applying DIT to Explain Social Phenomena

DIT was refined through empirical testing using data from both surveys (including focus groups) and laboratory experiments. DIT’s null hypothesis was that shared other-interest is not a force in economic choice (i.e., SIT is the only force). Every empirical test of DIT to date has resulted in rejecting the null. In addition, a substantive amount of empirical work has been done in a wide array of areas which implicitly supported DIT: duty, commitment, cooperation, loyalty, identity with norms and traditions, religion and political ideology shared in community—all represented in empathy (ethics) based other-interest—have been shown to be determinants of individual behaviour (Altman, 2012; Etzioni, 1988; Lynne, 2020; Tomer, 2017). The applications of DIT to various social phenomena ² considered here suggest arenas for further testing of DIT.

Conclusion

Leijonhufvud (2004) suggested, regarding mainstream SIT ‘Instead of looking for an alternative to replace it, we should try to imagine an economic theory to transcend its limitations…’. In this article, we proposed to refine economics by expanding single-interest analysis towards the dual-interest foundation. Such expansion will allow economic theory not only to better describe and explain a variety of social phenomena but will also provide a more adaptable analytical apparatus for designing public policies to better address the challenges humanity faces.