The Social Environment as a Cause in Economics

Have you noticed that economists are missing a word in their vocabulary? In microeconomics you’ll see words like ‘individual’, ‘utility’ and ‘maximize’. But you won’t see the word ‘environment’ anywhere. It seems that in microeconomics, individuals maximize their utility in a void. [1]

This lobotomy of the environment has led economists astray. By focusing only on differences between individuals, economists ignore a major part of human behavior. Individual differences are meaningful only in the context of an environment — especially a social environment.

The environment as a cause

To frame my argument, we need to leave economics behind for a moment. The problem is that economists treat the environment as something that is passive. It’s a stock of resources or a trove of ‘ecosystem services’. We can affect the environment, but it can’t affect us.

In contrast, I want you to think of the environment as something that is active. To get into this headspace, I want you to think like an evolutionary biologist.

In Darwinian theory, the environment plays an active role in evolution. To have evolution by natural selection, we need (heritable) differences between individuals. But without an environment, these differences won’t cause natural selection. Why? Because it’s the organism’s environment that determines if a trait is good or bad. The environment is an evolutionary cause.

Here’s an example. In the 19th century, the peppered moth population in Britain changed drastically. Before the industrial revolution, most peppered moths were white. But as Britain industrialized, most peppered moths became black.

What caused this evolutionary change? Biologists think it was the moths’ environment.

On natural-colored trees, white moths blend in with the bark. Black moths stick out. So in their ‘natural’ environment, white moths are better adapted. That’s why they dominated the moth population before industrialization. But as Britain industrialized, soot turned trees black. This made black moths better camouflaged. In this altered environment, black moths flourished and white moths declined.

The peppered-moth story is a clear case where the environment caused a species to change. The story has two ingredients:

  1. Individual variation
  2. An environment that acts on this variation

To have natural selection, we need differences between individuals (here, moth color). But these differences gain meaning only in the context of the environment (natural or soot-colored trees). The lesson is that we can’t separate individual variation from the environment in which it occurs.

Keeping individual variation, purging the environment

Having framed the ‘environment’ in an evolutionary context, I’ll return to where economists go wrong. Economists purge the environment from their theory of human behavior (neoclassical microeconomics). Instead, they focus only on individual variation.

I’ll use human capital theory to illustrate this environmental lobotomy. This theory explains income in terms of differences in human capital. Individuals with more human capital are more productive (the theory claims), and so earn more income.

Where is the environment in this theory? It’s nowhere to be found! In the world of human capital theory, individual variation happens in a void.

The story of cow capital

To see the problems with lobotomizing the environment, I’m going to tell you a story about ‘cow capital’. Think of this as a cautionary tale. It warns about the perils of purging the environment from a theory of animal behavior.

Our story begins with a biologist named Bob. Bob has set up camp on a farm and is studying the cows. These cows come in two colors: black and brown. Like a typical biologist, Bob is obsessed with fertility. So he asks: “Does cow fertility vary by color?”

To answer his question, Bob spends a year measuring cow reproduction. He finds that fertility does vary by color. Black cows have (on average) more offspring than brown cows.

Intrigued by this result, Bob tests for causation. He paints some black cows brown and some brown cows black. Then he measures the fertility of these painted cows.

His results are astonishing.

When brown cows are painted black, their fertility increases. And when black cows are painted brown, their fertility decreases. Color — whether natural or painted — affects cows’ reproduction!

Bob knows a sexy result when he sees one. He writes up his finding and publishes it in Nature. Then he returns to the field.

Back in the ivory tower, an economist named Nancy reads Bob’s paper. She thinks to herself: “Neoclassical theory can explain Bobs results!” So she writes a paper called “Cow Capital Theory”.

Here’s how the theory works. Color is a type of ‘cow capital’ — a skill that makes cows more productive. Nancy argues that black cows have more cow capital than brown cows. That’s why they have more offspring. But not only is cow capital a skill, it’s a skill that can be acquired. When brown cows get painted black, they acquire more cow capital. That’s why they become more fertile.

Pleased with her theory, Nancy publishes it in the American Economic Review. Economists read Nancy’s paper and celebrate the universality of human capital theory.

Meanwhile, Bob has discovered the real reason that black cows outbreed brown cows. The cows are owned by a farmer who breeds them for color! Every generation, the farmer chooses mostly black cows for breeding. The farmer is also nearly blind and can’t tell the difference between natural-colored and painted cows.

Contrary to cow capital theory, black cows are not innately more fertile than brown cows. Instead, the cows live in an environment where being black is advantageous. The environment (the farmer) causes black cows to outbreed brown cows.

The moral of our story is this: remove the environment from a theory of animal behavior and you’ll be led astray.

When all you see is individual variation, you attach undeserved significance to individual traits. Cow color becomes ‘cow capital’ — a magical source of fertility. The reality, however, is that the environment is what makes traits good or bad. Black cows don’t have more cow capital. They’re just favored by the farmer.

The social environment

In our story of cow capital, the most important part of the cows’ environment was the farmer — another species. Among social animals like humans, though, much of the environment is created by the species itself. We’ll call this the ‘social environment’.

Like the physical environment, the social environment determines if a trait is good or bad. Again, it’s worth contrasting this evolutionary view with neoclassical economics. In neoclassical theory, traits are significant in their own right.

Take education.

According to neoclassical theory, education makes people more productive, and this productivity makes them earn more income. In our evolutionary theory, however, education isn’t innately connected to productivity. Instead, it’s a trait that the social environment acts on.

Put a person with PhD in a hunter-gatherer society and they won’t be rewarded for their higher education. Put the same person in an industrial society and they will be rewarded. It’s the social environment, not the trait itself, that determines rewards.

Hierarchy: the farmer and the cows

Now that you’ve laughed at the story of cow capital, I’m going to show you that it’s not that far-fetched. It’s a good metaphor for how traits are rewarded in a hierarchy, and for how economists misinterpret these rewards.

In our story of cow capital, the farmer and the cows form a hierarchy. The farmer has power over the cows, who surrender their reproductive decisions to him. Because the farmer breeds mostly black cows, the black cows are rewarded.

The same logic applies in a human hierarchy. The farmer represents those with power. In a hierarchy, the powerful determine which traits get rewarded.

And the cows? They’re a metaphor for the masses at the bottom of the hierarchy. After the powerful create the reward system, the masses are at the mercy of this environment.

And cow color? It’s a metaphor for traits that are valued by the hierarchy. (Given humanity’s history of racism, you could take the trait of color literally though.)

Having fleshed out the metaphor, let’s look at hierarchy from a biologist’s point of view. A hierarchy is a social environment characterized by concentrated power. In this environment, those with power get more resources. (I’ve proposed that this is a universal feature of hierarchies). So you get rewarded by climbing the hierarchy.

What varies between hierarchies are the traits that get you power. Historically, most societies rewarded birthright. (Think of feudal caste systems in which rank was fixed at birth.) In contrast, modern societies award power by ‘merit’. In these societies, you climb the hierarchy if you have credentials.

From the biologist’s point of view, we have two factors at work in a hierarchy:

  1. Individual variation
  2. An environment that acts on this variation

If this seems familiar, it’s because it’s the same two factors as in the peppered-moth story and the cow capital story.

Now let’s look at hierarchy from the economist’s point of view. To do this, we keep individual variation but we ignore the social environment. So let’s forget that hierarchy exists. When people move up the hierarchy, we see only their traits and their reward.

In modern societies, we see that educated people are rewarded. So we propose that education makes you more productive.

We can apply the same thinking to hierarchies that reward birthright. We ignore the hierarchy and see only that family lineage determines rewards. We conclude that highborns are innately better than lowborns.

So neoclassical economists are actually continuing the tradition created by feudal apologists. Ignore the social environment and glorify individual traits. By doing so, you legitimize the social hierarchy.


[1] Yes, there is a sub-discipline of economics called ‘environmental economics’. But this field is an afterthought, tacked onto microeconomics like Eeyore’s tail. Environmental economics takes the principles of microeconomics and applies them to problems like pollution. What the field doesn’t do is put the environment into economists’ core theory of human behavior.

Cover Image: Wikimedia Commons

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