New book

Is our economic system fixable? What could be an alternative?

March 9, 2023

The flaws of the modern economic system in the Western world have become pervasive with the dominance of the Big Tech firms, while antitrust regulation and enforcement struggle to restrain these firms. We cannot blame the Big Tech firms for mastering the rules of an economic system that allows profit maximization to override societal values such as sustainability and well-being.

What is the root cause of these challenges, and how can we cope with them?

In my recent book, I examine several grand challenges and identify one underlying cause: our economic system reinforces opportunistic behavior by prioritizing profit and utility maximization. Despite heterogeneity in individuals’ inclinations to behave opportunistically, this system rewards the opportunists while penalizing those who seek to benefit others. To remedy this, I propose an alternative economic system – the cooperative economy, which is instituted on prosocial behavior.

Societal grand challenges linked to the modern economic system

Wealth concentration and economic inequality

Economic inequality is on the rise. In the US, three individuals possess wealth that is greater than that of half of the population. The income share of the affluent has increased, but their tax liability has declined because of regressive taxation and tax evasion. Economic inequality is associated with shorter life expectancy, corruptionת and political instability. Although the UN has sought to reduce inequality, government policies and welfare programs often reinforce it, with labor unions losing power. 

The grip of platform owners

The Big Tech firms dominate digital markets. They suppress competition with exclusionary practices; their vendors do not receive their fair share of the value; they restrict consumers’ choices while increasing switching costs and prices; and they exploit most employees, who are often underpaid, overworked, and silenced. Policy making, antitrust laws, and regulation are too slow and weak to catch up with the platform owners that modify their business models at will. Breaking up the Big Tech firms or imposing self-regulation is unlikely to remedy this.

Loss of privacy and free choice

Consumers pay the platform owners with personal data, which is analyzed, dissected, and reconstructed using advanced algorithms, machine learning, and artificial intelligence. Consumer behavior is (mis)guided as per the profit-making interest of the platform owner. The Cambridge Analytica scandal is not an isolated event. In the US, lobbyists delayed protective regulation, while the EU’s GDPR places a burden on small vendors, thus reinforcing the grip of platform owners.

Overconsumption and abuse of natural resources

With firms’ relentless profit-seeking and automation, the exploitation of raw materials and the extraction of natural resources have become excessive. Consumers who consume to satisfy emotional desires have done little to change their habits and become more mindful about the consequences of their consumeristic lifestyle. Some firms promote alternative energy sources and recycling, but responsible consumption has not been regulated since this is likely to restrict consumers’ utility and firms’ profits while jeopardizing economic growth, so all stakeholders have vested interest in enduring overconsumption.

Some drawbacks of globalization

Globalization has fostered economic inequality by increasing the return on capital while depriving the underprivileged. Multinational corporations have optimized their supply chains, reduced costs, and evaded taxes. Globalization has challenged societal structures and promoted overconsumption while making supply chains more vulnerable. Encouraging multinational corporations to negate their profit-seeking mission is hopeless.

The root cause: the economic system lets opportunistic behavior suppress prosocial behavior

These grand challenges have taken a toll on society, and their unfortunate consequences for humanity’s well-being seem inevitable. Yet all these problems have one root cause – greed is the underlying motive that drives opportunistic behavior at all costs. We cannot blame firms for seeking profits or consumers for maximizing utility. It is the economic system that has prioritized these aims over societal values and rewards opportunistic entrepreneurs. Interestingly, research suggests that some individuals are more opportunistic than others, but the majority tends to be cooperative.

So why do we mostly observe opportunistic behavior in our economy? The design of this system reinforces opportunistic behavior beyond the tipping point. All efforts to fix the economy via regulation, legislation, and aid treat the symptoms, not the disease. We must admit that the modern economic system is unfixable.

We cannot amend a system that is driven by opportunistic behavior, but we can design a new system that is not. The mirror image of opportunistic behavior is prosocial behavior, whereby individuals seek to enhance the utility of others at a personal cost, rather than maximize their own utility at the expense of others. Experiments suggest that half of humanity is conditionally prosocial—that is, they will be kind to others if others are kind to them. Acts of kindness are, however, often penalized in our current economic system. By rewarding those who exploit others, this system breaks the natural cycle of positive reciprocity.

This is how opportunistic behavior drives out prosocial behavior. But introducing new design principles can reinforce prosocial behavior while shielding us from opportunistic behavior. This can possibly promote economic equality, redistribute wealth and power, cease exploitation of private data, and restrict overconsumption and abuse of natural resources.

The cooperative economy: a prosocial solution to the grand challenges

In my book, I introduce the cooperative economy—a prosocial economic system that serves societal values while acknowledging resource constraints. It limits consumption and profit making while facilitating economic equality. It serves the interests of consumers, vendors, and employees while preventing the platform owner from accumulating power.

Unlike the greed that drives the current economic system, the engine of the cooperative economy is prosocial behavior. The system penalizes opportunistic behavior such as false disclosure of information and arbitrage attempts, while reinforcing prosocial behavior to the point that it can overtake opportunistic behavior, leading to a more just distribution of value.

The cooperative economy leverages price subsidization whereby high-income consumers subsidize low-income consumers. Prosocial behavior underlies this process, with consumers enjoying the happiness that comes with donation and influence. Unlike progressive taxation which imposes a burden while depriving taxpayers of their discretion, price subsidization creates a perception of unmediated donation to their community.

The cooperative economy also provides employees with the freedom to pursue a profession of choice or start a business without worrying too much about failure, so the system encourages entrepreneurship and discourages free riding.

Prosocial behavior is also fostered by restoring a sense of community that supports face-to-face interaction and mutual support among exchange participants. Creating a constellation of local economies minimizes transport distances and value chain vulnerability, while enhancing sustainability.

Another design principle is consumption per need rather than desire. This requires imposing reasonable consumption limits and profit caps, with a balancing process that redirects excess profit back to consumers.

These principles encompass various stakeholders’ responsibilities. As part of the platform’s responsibilities, no attempt should be made to influence consumer behavior. The platform operator must also avoid invading its vendor’s businesses. Protective employment is promoted by reducing salary differences by vendors, which further enhances economic equality.

The cooperative economy ensures fair competition by providing new entrants with guaranteed market access. In turn, stricter controls keep vendors at bay, ensuring consumers’ welfare. Vendors with higher quality receive priority in fulfilling orders.

The cooperative economy can be implemented as a digital platform, with advanced technologies used not to abuse consumers but to protect users from opportunistic behavior.

To prevent the concentration of wealth and power, the system excludes financial shareholders, whereas consumers, vendors, and employees receive an equal voice in promoting their interests.

The cooperative economy can dismantle the persistent problems from which the modern economic system suffers. Instead of applying a band-aid to this system, the proposed alternative reengineers its DNA, replacing its greed-driven core logic with a counter-logic of prosocial behavior. To achieve that, the cooperative economy should be a community grassroots initiative. It can leverage some government support, but mostly the support of individuals who identify with its mission and cause.

Read more

Dovev Lavie, The Cooperative Economy: A Solution to Societal Grand Challenges, Routledge 2023.

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