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Austrian economist Ernst Fehr tells Mark Buchanan why global economics could benefit from a touch of compassion and why a good wrestler never gives up

FROM outside economist Ernst Fehr’s office at the University of Zurich in Switzerland you would have no idea that he had been tipped to win a Nobel economics prize. For one thing, the name on the door looks as if it has been dashed off on the cheapest of departmental printers.

But Fehr himself seems to fit the bill. Smiling broadly, he extends a hand, eager to talk about his experiences, whether favourable, amusing or confounding. Ironically, he says, it was one of the latter that led to his current success. In reality, it all started with failure.

Twenty years ago, Fehr had a seemingly sensible idea – that a deep-seated human preference for fairness might play an important role in economics. He thought it might explain why companies – even in countries without a minimum wage – don’t offer jobs paying wages far below the standard, despite research showing plenty of unemployed people would willingly take the work. It doesn’t happen, he suggested, because companies know that workers hired at a lower wage feel they are being cheated, causing them to grow disgruntled and work less hard.

Fehr wrote a paper on the idea that fairness matters, which was promptly rejected by every prestigious economic journal he sent it to on the grounds that people only care about how much they get for themselves, not how that compares to what others might receive. “Most economists would be deeply unhappy if paid less than what they consider to be fair, so I thought I had a convincing answer,” Fehr says. “But I found out that in theoretical economics, fairness just doesn’t count.”

However, as a former Austrian national wrestling champion, Fehr doesn’t give up easily. Over the past decade, he has pursued his ideas on human fairness far past their relevance to employment, and he is now experiencing something of a reversal of fortune. His work is overturning 50 years of economic wisdom about motivation, showing that most economists have overlooked one of the most important factors determining economic outcomes: our values about fairness. “We’ve moved past the doubt stage,” he says. “There are now fewer serious critics.”

At the University of Zurich, Fehr heads up the . The institute owes much of its reputation to the radical theme of Fehr’s work, which aims to use lab experiments to provide an empirical basis for economic theories of behaviour. It is one part experimental psychology, one part economics, and one part searching tirelessly for ever more students to use as behavioural guinea pigs. “I don’t think we’ll ever run out of students,” Fehr says, pondering the numbers. “But we do have to work hard to find them.”

That wasn’t a problem for economists of the past, who eschewed empirical work for the elegance of pure theory. Traditionally, economic theory assumes that people care only about themselves, pursuing their own self-interest. Even when people cooperate, the theory goes, this is really only pursuing their own interests by harnessing others’ efforts. That may seem cynical, but it is a mainstay of economic thinking that has taken painstaking research by Fehr and his colleagues to refute.

Suppose, for example, you approach a stranger on the street and hand them $20. You tell them they can keep the money or give some to an unknown person. Whatever they choose to do, they will never meet that person, nor will anyone learn of their decision. Will the stranger keep it all or give some away? If you think like a “hard-headed” economist, you’ll assume that everyone short of the late Mother Teresa would pocket the lot. But when Fehr and his colleagues did this a few years ago they found that a significant proportion of people gave away close to 50 per cent of the money.

These and a host of similar results represent “the most important work on the human sense of justice in many decades”, according to evolutionary biologist Robert Trivers of Rutgers, the State University of New Jersey in New Brunswick. Fehr has won awards for it around the world. In February of this year, he gave the prestigious Clarendon lectures in economics at the University of Oxford.

None of this, apparently, has gone to his head, as he gently corrects my own slightly mangled interpretations of his work, and shares his bemusement over the emotional, sometimes almost hysterical reaction his work seems to provoke. “Our latest experience was just amazing,” he says, referring to a paper he published in Nature in January (vol 463, p 356).

“Hard-headed thinking played a fundamental role in the recent economic crisis… it’s a biased way of perceiving the world”

In that paper, he and his co-authors showed that testosterone, despite its reputation as a promoter of aggressive behaviour, actually made people more cooperative when playing economic games. They used female volunteers since previous studies have indicated that women are more likely than men to show behavioural changes if given very low doses of the hormone. “In the end we had six referees. Some had legitimate points, but one was really irrational and emotional,” Fehr says. “The referee suggested that maybe we had done a more general study and then decided only to report the effects in women, basically accusing us of being dishonest.”

Such responses, Fehr suspects, arise from a deep-seated resistance in many people to the idea that something as apparently complex and unique to humans as our social instincts could find a relatively simple basis in chemical changes in brain activity. In other work, he has shown that broken promises show up as enhanced brain activity reflecting emotional conflict, and do so well before a person actually makes the final decision to break a promise.

Fehr’s most recent work focuses on so-called neuroeconomics, which explores the roots of our social instincts and emotions. That our precious moral values may ultimately be biologically based upsets some people, Fehr admits, but science is science. “I’m quite happy with whatever I find,” he says. “You have to accept what the data tell you.”

In the wake of the worst financial crisis in nearly a century, that may be good advice to economic science itself. At a in Zurich last month, people from the fields of economics, psychology, philosophy and religion gathered to discuss the extent to which the crisis was enabled and even amplified by traditional thinking in economics. According to Fehr this is exactly what has steered us down the wrong path. “I think this kind of thinking played a fundamental role in the recent crisis,” he says, “as this notion that people are strictly self-interested has been the dominant mindset for decades. Almost everyone in business, finance or government studies some economics along the way and this is what they think is the norm. It’s a biased way of perceiving the world.”

The paradox is that it’s the economists’ supposedly “hard-headed” thinking that has turned out to be profoundly naive. Getting that message out is now one of Fehr’s most urgent aims.