17 April 2012

The Autism of Economics

In a prior post, I offered an alternative explanation for socialism’s failure.  In doing so, I critiqued economists that defend the free market on the grounds of monetary incentive structure of being too narrow in their thinking.  While monetary incentives play a role in human behavior, they are not the only motivator, and are often not the primary motivator.

Unfortunately, many economists ignore this simple truth in their analyses of various market-related issues.  I suspect the main reason for this has to do with the very simple fact that many economists have a sort of penis envy towards physicists, by which I mean that economists seem to love complex mathematical models.  Price points are extremely useful to these models, as they lend the models an air of objectivity and, in some cases, finality.  While some of the more sophisticated economists know that they can assign value functions to non-monetary indices, the assignments of value often feel arbitrary, thus undermining the air of objectivity that economists are so desirous of, perhaps in their quest to gain some sort of influential power over policy-makers, which is thus ultimately a form of status-seeking.

This mechanistic approach to economic analysis is quite autistic in that it generally fails to account for value that humans place on things that cannot be quantified monetarily, like emotions.  Indeed, the economics profession is filled with sundry examples of autistic jackassery that is fundamentally predicated on economists being, for whatever reason, completely unable to understand what motivates human behavior.  To their surprise, humans are motivated by things other than money.  The economists call these motivations irrational.

The most egregiously autistic economists are those that defend free trade and free labor, which usually requires the denial of the social constructs broadly known as culture and society.  This in turn undermines the concept of the sovereignty of nations and states.  Whether this is a good thing is debate best reserved for another post.  For now, the relevant consideration is that not everyone thinks that free trade and free labor are good ideas because some people drive some value from what they perceive to be patriotism.  To put it another way, there are a decent number of people who find the feelings they get from identifying with a collective entity (say, the US) or supporting a concept (say, Americanism) to be worth the cost of excluding foreigners.  Because this imposes some quantifiable monetary costs without providing quantifiable benefits, those who oppose free trade and free labor are derided as ignorant, xenophobic, and/or simply stupid.

This autism extends to even the presumably least autistic branch of economics:  behavioral economics.  Here, people are defined and accepted as being irrational.  As such, it is the policy makers who need to get on board with man’s irrationality and adjust accordingly.

But even this view, where human idiosyncrasies are tolerated and occasionally celebrated, is essentially predicated on the notion that value is only measured monetarily.  For example, leading behavioral economist Dan Ariely tried to prove irrationality in his book Predictably Irrational.  The irrefutable experiment undertaken by Ariely consisted of offering people chocolate for purchase.  There were two options:  one with a simple, sticky price (two pieces for five cents, if memory serves me correctly) and one with a more complex price (a differently-weighted piece for three or four cents, assuming my memory serves me correctly).  The utility maximizing option was the latter one, yet the vast majority of people chose the former.  From this Ariely concludes that people are irrational.  He does not ever think to consider whether such a trivial decision merits any significant consideration as regards to utility maximization.  Stated another way, when the stakes are so low, there is little point in weighing your options.

Like the mainstream economists, Ariely and other behavioral economists fail to account for non-monetary value, which in the aforementioned case would be the value of time.  Is it really rational to use much mental energy for such a negligible decision?  If not, how can it be considered irrational to not use one’s time to maximize a miniscule amount of utility?

Beyond this, economists seem to be unable to recognize the motivating forces behind common interactions, like gift-giving.  Economists soullessly deride people for giving non-cash gifts, declaring such interactions to be “inefficient.”  The theory is that if people valued the gifts they received at par with or in excess of market price, they would have bought the gifts themselves.  That the recipients of a certain gift did not buy the gift for themselves is proof positive that they did not value the gifts at price, and therefore the giver is wasting money because the value the recipient places on the gift is not equal to or greater than the price of the gift.

This analysis fails because it fails to account for the value of the gift exchange itself.  Both the giver and the recipient place value on the interaction itself, and simply that which is being exchanged.  The giver enjoys an emotional response to pleasure exhibited by the recipient and vice versa.  Furthermore, the broader signal that the giver cares for the recipient presumably has long-term non-monetary value.  Unfortunately, economists’ autism prevents them from seeing the emotional and social value of a gift exchange, thus leading them to deride a longstanding tradition.

This autism is occasionally, and quite perversely, worn as a badge of honor.  Some economists often seem to view themselves as somewhat superior for having overcome some of their petty irrationalities.  But doing this can be dehumanizing, since it is our so-called irrationality that makes each of us unique, and provides some meaning in our lives.  Who cares if we’re more likely to buy chips when their cost is 2 for $5 than when they’re $2.50 a bag? This heuristic may not be totally rational from a pricing standpoint, but it is an efficient way of dealing with a trivial decision, which means less time is wasted thinking about trivial things and is instead spent enjoying life.  Should people be begrudged for that?

Now, none of this is to suggest that the study of economics is worthless and unworthy of support.  On the contrary, economics is an important subject, and most analysis is useful and worthy of study.  However, economics does have some blind spots, mostly due to its current autism.  Understanding economics’ autism is helpful, then, because it enables one to see the limits of economic analysis and adjust one’s interpretation accordingly.  Thus, economics need not be scrapped; rather, people should be aware of its limits imposed by the autistic tendencies of its practitioners.

6 comments:

  1. The criticisms you make of mainstream economics are all ones I would (and do) agree with. However, I'm now reading whatever austrian economics texts I can get my hands on ("Human Action" is probably the most comprehensive one that explains concepts from first principles) and this is a school of thought that seems entirely sensible to me, coming as I do from a mathematical background.

    Before reading the austrian school, I used to think of economics as the science of scarce resource allocation, somewhat removed from the (fallible) individual's whims and choices. If that is a bedrock axiom, then its understandable why mainstream economics went the way it did, with all sorts of nonsense such as the perfectly rational economic man, and all sorts of mathematical models that are assumed to be 'empirical' in nature.

    The austrians however (particularly von Mises) see economics as the (deductive) science of understanding and predicting outcomes of human actions. Efficient allocation of scarce resources for example falls out of this framework as a logical conclusion given scarcity, rather than a foundational axiom.

    The austrians also reject the notion of empirical modelling, on the basis that its impossible to have laboratory conditions for economic observations. Whilst many regard this as a failing, it makes perfect sense to me as a mathematician (all mathematics is deductive, hence by definition not empirical, but you don't see many scientists complaining about this as a failing of maths for example).

    If you haven't started reading the austrian school, I would strongly recommend you do so - a good starting point being the von Mises institute website, from where you can download electronic versions of the seminal works free of charge.

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  2. You must be new to GS' blog, he's pro Austrian School economics.

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  3. @Durandel- Hence my link to the Mises Institute in my left sidebar.

    @Gunn- I am most sympathetic to the Austrian school, though I borrow from the classical school and the neo-Keynesians. However, the Austrian school still suffers from some of the autism that plagues economics (see the linked post at the beginning of this post). Metaphorically, mainstream economics would be autistic while the Austrian school would have Asperger's. Again, this is not to discount their contributions, only to recognize the limits, especially since some forms of value can't necessarily be described or quantified, which necessarily reduces the "science" of economics into a series of axiomatic statements, making it align more with philosophy than science.

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  4. Metaphorically, mainstream economics would be autistic while the Austrian school would have Asperger's.

    I agree with Simon here. Still, if your looking for the least Autistic/Aspergy school of economics then you've got to head off to the Ordoliberalists.; It's Austrian economics taking social considerations into account.

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  5. Apologies, didn't see the link in your sidebar to the von Mises institute.

    On the point about value, I'm not really sure I follow if looking at this through an austrian lens. Specifically, value is a subjective idea based on an individual's choice. Thus value is evidenced through an individual's actions (and inferred via relative priorities for satisfaction of an arbitrary list of wants as defined by that individual). As noted frequently by austrians, value as a standalone objective construct is a false idea.

    I also read your linked post, and again I'm unclear on a couple of things.

    Firstly, the profit motive is not an end-goal for individuals under the austrian school; rather, the individual is interested in fulfilling various wants, and some of these are facilitated by obtaining resources (interchangeable with money) to achieve this. So if, for example, an individual has desires that are satisfied entirely by non-scarce resource (purely hypothetically) then him having no profit motive is still entirely consistent with the austrian school (he would end up economising his own time and order of choices rather than maximising monetary gain).

    As I understand it, the rebuttal of collectivism under the austrian school is based on the lack of signalling function in the absence of market prices for scarce resources. This results in more urgent individual needs being left unsatisfied even as less urgent needs are met by the centrally planned authority. This is the fundamental difference, as I see it:

    - capitalism allows each individual to satisfy his needs in order of most urgent to least urgent, until his resources run out and he is no longer able to satisfy further needs. Motivation to satisfy those further needs results in him taking part in productive ends.

    - collectivism imposes an ordering of needs satisfaction on an individual that may not be consistent with his own individual priorities, and each marginal unit of productivity undertaken by him serves (most likely) to meet a need that the individual doesn't consider as immediately pressing to further his happiness

    Demotivation under collectivism is essentially then a consequence of individual ambivalence to greater expenditure of his own effort, as he doesn't necessarily see a good return on his time and labour. In other words, the reason stuff doesn't get done is that those that would normally do it don't see the point of doing it.

    Re: Social Pathologist, had not heard of that school, will take a look at what its about, thanks for the heads up.

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  6. "Demotivation under collectivism is essentially then a consequence of individual ambivalence to greater expenditure of his own effort, as he doesn't necessarily see a good return on his time and labour. In other words, the reason stuff doesn't get done is that those that would normally do it don't see the point of doing it."

    Except that a) this isn't always true (i.e. some things do actually get done) and b) not everything that gets done has an obvious return. Regarding the latter, that was my point about status-boosting. In a collectivist society, status is the primary currency, but this can't be measured easily or accurately, if at all. Thus, economists are relegated to focus on the more material and technical aspects of an economy because they are measurable. Again, this doesn't invalidate their arguments or otherwise render their arguments useless, it is simply a limit to the more technical approach, which even Austrians engage in. For clarity's sake, understand that I am extremely sympathetic to the Austrian's view (my main disagreement is with the anarchist wing, which strikes me as a tad naive), and I don't disagree with much of their analysis. I simply view it as a starting point, and not a conclusion.

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