Homo sapien
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Mainstream neoclassical economic models used to plan and describe economic activity simplify the way that humans and firms interact with one another as conforming to an ideal form - Homo Economicus who is (1) self-interested (2) profit-maximizing and (3) perfectly informed. This model simplifies and excludes important features of Homo Sapiens. In the best case it's an ideal simplification, in a worst case it's equivalent to a square peg in a round hole. Humans are social beings that value the fate of their community, family and safeguard their own interests. They are also capable of cheating, corruption and this is no less true for private as it is for public institutions.
The optimism of classical economic models hopes that somehow Adam Smithās āinvisible handā converts the private self-interest of individuals into general public welfare. For some this is a great leap of faith. It would not be intuitive to conclude that a system that facilitates selfish actions of individuals leads to socially optimal welfare solutions. Winner-takes-all dynamics and monopoly power in complex social networks are positive feedbacks that accelerate and reinforce inequalities. The market failure of the U.S. subprime mortgage crisis of 2008 exposed the dark side of unrestrained capital markets. The self-interest behavior of individual actors within the financial institutions did not improve the public welfare but instead created hazardous conditions both to their shareholders and the financial system as a whole. Given the emphasis of free market policy advocates on first principles of the neoclassical economic model - Homo Economicus, one of the weaknesses of the ideology is itās inaccurate and contradictory model of human motivation and behavior as a self-interested, omnipotent, rational, profit maximizer principally concerned with making more money. A look under-the-hood at how humans behave and interact with one another reveals a complex and diverse picture.
Humans exhibit cooperative and competitive (selfish) dynamics, information is anything but perfect as bandwidth limits, heuristics, asymmetry are the rule rather than the norm. Bounded rationality is the most optimistic picture of a decision making process corrupted by conformity, cognitive biases and loss aversion. To mitigate the hazardous dynamics in markets and complex networks with negative feedback, rules, monitoring and enforcement can be designed so that the actions of individuals are coordinated towards the general public welfare.
You can improve only what you measure and this is true when it comes to public welfare. For this reason it is important to use meaningful measures of human satisfaction, motivation, given that political legitimacy rests in the ability to consistently sustain the conditions that lead to high life satisfaction for a majority of society (Ward, 2015). While there is evidence of a general link between rising incomes or GDP and life satisfaction, on closer examination this relationship is not absolute but subject to local context. Furthermore, this broad measure can be subdivided into actionable social and economic features - human development, low inflation, low unemployment, reducing inequality, a sense of autonomy, belonging to family, community and confident prospects of continuity for generations into the future.
This Appendix begins with a review of the evidence and solutions to the dual competitive and cooperative nature of human behavior, how these effects scale in complex social networks and the effect of institutions. Next it explores imperfections of information transmission and bias errors human decision making. The Appendix concludes with response to the question of how to meaningfully measure prosperity for social and imperfect humans.