Emotional intelligence in a neoclassical framework and the nature of capitalism

Purpose - The purpose of this paper is to introduce the factor of emotional intelligence (EI) into the calculus of neoclassical analysis under precautionary saving aiming at stabilizing consumption in the case of an exogenous output shock. Design/methodology/approach - The introduction of EI differentiates individual firms in handling production uncertainty and individual consumers in coping with consumption uncertainty, but the source of uncertainty is exogenous and affects all the same; there are no idiosyncratic risks and uncertainties. This in conjunction with the median-voter-theory like approach to agent heterogeneity prompted by EI, replicates the result that aggregates quantitative predictions are almost indistinguishable from their representative agent counterpart in life cycle models of precautionary saving. Findings - EI corroborates stabilization greatly but only the introduction of a monetary authority would fully stabilize the system by injecting or withdrawing money depending on the state of the economy. Money becomes centrally issued and it would be destabilizing if it was accompanied by central and/or commercial bank seigniorage. Median EI is found to coincide with homo economicus' rationality. These results point to the importance of preserving the institutional character of capitalism as a free enterprise but also a competitive system under a government in the service of the private sector. Originality/value - Methodologically, this paper acknowledges the mutual interdependence between human action and social structure in the liberal setting in which free enterprise is a socioeconomic process that identifies value through exchange under the sociopolitical process of democracy.