Conventional microeconomics assumes that individuals seek to maximize their happiness, often called utility, by consuming goods and services while being constrained by their earnings. Tibor Scitovsky (1976) in his seminal work on consumer behavior suggested that psychological factors such as arousal, status, and sense of control over life events may influence happiness. In addition, Art Goldsmith, Jonathan Veum, and William Darity Jr. (1997b) assert that psychological elements affect workplace performance and, hence, earnings. Thus, psychological factors must be accounted for to attain a rich understanding of consumer behavior. Behavioral economics is the subfield of economics that integrates insights from economics and psychology into the study of economic and social behavior. “Psychological capital” refers to the collection of values, norms, perceptions, cognitive elements, and affective or emotional factors embedded in a person that can be expected to influence happiness and earnings. This essay provides an overview of how the concept of psychological capital has been integrated into social science research.
The roots of behavioral economics, and hence the importance of psychological capital, can be found in the discovery by economists that economic motives are often at odds with actions and that in many instances psychological elements appear to shape behavior. For instance, conventional economists adopt the assumption that individuals are rational decision makers who compare the additional benefits and costs of an action and engage in those activities offering a net gain. This perspective, however, is difficult to square with many commonly observed behaviors including customers tipping at a restaurant they will never again frequent because it is so far from their home. Psychologists explain this behavior as evidence that actions are guided by values, such as fairness, and cultural norms learned through socialization. There is also reason to believe that perceptions regarding safety and economic security are important determinants of happiness. Joblessness, especially unemployment, creates a sense of economic vulnerability. Goldsmith, Veum, and Darity (1997a) draw a connection from unemployment to poorer psychological well-being in several distinct but interrelated ways: as a consequence of lower self-esteem; as a result of a feeling that life is not under one’s control, leading to helplessness and depression; and as a loss of the social byproducts of participation in a work environment.
Psychological elements are expected to affect a person’s wage, which in turn influences his or her level of consumption and happiness. A standard argument in economics is that a person’s wage is tied to his or her workplace performance or productivity, which is largely governed by his or her level of skills, called human capital. Of course, effort on the job is also expected to influence productivity and wages. Carl Shapiro and Joseph Stiglitz reported in 1984 that economists claim that workplace effort is promoted by fear of joblessness or, according to George Akerlof in 1982, to reflect gratitude for favorable treatment by the firm. Expectancy theory is the most widely accepted and empirically supported theory of motivation or effort among psychologists. According to expectancy theory the strength of a person’s motivation depends on the extent to which he or she believes that exertion, performance, and reward are linked tightly. Attribution theorists have proposed that an aspect of personality—locus of control—governs a person’s perception of the strength of the connection between exertion, performance, and reward. Julian Rotter in 1966 classified individuals who believe they are masters of their own fate, and hence bear personal responsibility for what happens to them, as internalizers. Externalizers are those who believe they have little, if any, influence on the events that influence their lives. Expectancy theory predicts that a person with a more internal locus of control will be more motivated than a comparable individual whose locus of control is external.
Psychological capital is a broad term used to encompass various features of an individual’s mind-set and personality, including motivation and emotional wellbeing. The convention in psychology is to use a battery of questions, called an inventory, to obtain a scale that gauges the psychological construct to be measured, such as motivation—locus of control—or self-esteem. Morris Rosenberg developed a survey instrument in 1965 to measure self-esteem because opinions about “self” are virtually the most treasured of our opinions and a crucial aspect of personality. He conceives of self-esteem as multidimensional, comprising notions of worth, goodness, health, appearance, skills, and social competence. Rosenberg uses a series of questions, each answered on a two point (0,1) basis. His measure of self-esteem may range in value from 0-6, with a higher value representing a greater level of self-esteem. Herb Lefcourt used a similar methodology in 1982 to measure locus of control, with larger values reflecting a more internal orientation, and hence a higher level of motivation.
Many economists are skeptical that elements of a person’s psychological capital, such as locus of control, can be measured accurately by scales constructed from self-reported evaluations collected in the form of responses to survey questions. Their concerns are twofold. First, that it is difficult to compare responses across individuals because their replies are not anchored to a common baseline. Consider a question aimed at assessing a person’s mental health that asks how often they have feelings of anxiety, with response options including; 1 equating to never, 2 for occasionally, 3 representing often, and 4 meaning all of the time. Two different persons who have similar bouts of exposure to depression may answer this question differently, one reporting occasionally and the other often, resulting in misclassification error because their frame of reference is different—there is no common baseline. To reduce this problem investigators transform responses to a two-point scale such as never versus not never, which reduces misclassification error.
The second concern is that subjective responses may differ widely from objective evaluations. A person may report feeling anxious while a professional evaluation of the individual conducted by a physician or clinical psychologists may lead them to conclude that the person is not suffering from anxiety. Research by Anne Case, however, offers evidence that a person’s subjective responses to health questions about his or her children are virtually identical to independent assessments conducted by a physician. Thus, social scientists now conduct empirical studies of the link between psychological capital and economic outcomes. For instance, as reported by Goldsmith, Veum, and Darity in 2000, they find that persons who are more internal in their outlook—those more motivated— earn higher wages, and that unemployment leads to lower self-esteem and a more external perspective (1997a). The mental health consequences of adverse developments, however, will be less severe for persons with an external outlook because they do not blame themselves for the situation. Thus, high status individuals with an internal locus of control are particularly vulnerable in terms of emotional well-being to negative occurrences that arise at the workplace or in the family. Minorities often hold an external locus of control both as a result of past discrimination and as a defense mechanism to avoid self blame for undesirable outcomes that are beyond their control. Thus, members of minority groups may experience less harm to their mental health due to adverse social and economic developments.
SEE ALSO Economics, Labor; Locus of Control; Mental Health; Rosenberg’s Self-Esteem Scale; Rotter’s Internal-External Locus of Control Scale; Self-Esteem
Akerlof, George A. 1982. Labor Contracts as a Partial Gift Exchange. Quarterly Journal of Economics 97: 543–569.
Case, Anne. 2002. Economic Status and Health in Childhood: The Origins of the Gradient. American Economic Review 92 (5): 1308–1334.
Goldsmith, Arthur H., Jonathan R. Veum, and William Darity Jr. 1997a. Unemployment, Joblessness, Psychological Well-Being and Self-Esteem: Theory and Evidence. Journal of SocioEconomics 26 (2): 133–158.
Goldsmith, Arthur H., Jonathan R. Veum, and William Darity Jr. 1997b. The Impact of Psychological and Human Capital on Wages. Economic Inquiry 35 (4): 815–829.
Goldsmith, Arthur H., Jonathan R. Veum, and William Darity Jr. 2000. Motivation and Labor Market Outcomes. Research in Labor Economics 19: 109–146.
Lefcourt, Herb. 1982. Locus of Control: Current Trends in Theory and Research. 2nd ed. Hillsdale, NJ: L. Erlbaum Associates.
Rosenberg, Morris. 1965. Society and the Adolescent Self-Image. Princeton, NJ: Princeton University Press.
Rotter, Julian B. 1966. Generalized Expectancies for Internal Versus External Control of Reinforcement. Psychological Monographs 80: 609.
Shapiro, Carl, and Joseph E. Stiglitz. 1984. Equilibrium Unemployment as a Worker Discipline Device. American Economic Review 74 (3): 433–444.
Arthur H. Goldsmith