|
Economics_ _Psychologys_Neglected_Branch
| Economics - Psychologys Neglected Branch
"It is impossible to describe any human action if one does not
refer to the meaning the actor sees in the stimulus as well as
in the end his response is aiming at." Ludwig von Mises
Economics - to the great dismay of economists - is merely a
branch of psychology. It deals with individual behaviour and
with mass behaviour. Many of its practitioners sought to
disguise its nature as a social science by applying complex
mathematics where common sense and direct experimentation would
have yielded far better results.
The outcome has been an embarrassing divorce between economic
theory and its subjects.
The economic actor is assumed to be constantly engaged in the
rational pursuit of self interest. This is not a realistic model
- merely a useful approximation. According to this latter day -
rational - version of the dismal science, people refrain from
repeating their mistakes systematically. They seek to optimize
their preferences. Altruism can be such a preference, as well.
Still, many people are non-rational or only nearly rational in
certain situations. And the definition of "self-interest" as the
pursuit of the fulfillment of preferences is a tautology.
The theory fails to predict important phenomena such as "strong
reciprocity" - the propensity to "irrationally" sacrifice
resources to reward forthcoming collaborators and punish
free-riders. It even fails to account for simpler forms of
apparent selflessness, such as reciprocal altruism (motivated by
hopes of reciprocal benevolent treatment in the future).
Even the authoritative and mainstream 1995 "Handbook of
Experimental Economics", by John Hagel and Alvin Roth (eds.)
admits that people do not behave in accordance with the
predictions of basic economic theories, such as the standard
theory of utility and the theory of general equilibrium.
Irritatingly for economists, people change their preferences
mysteriously and irrationally. This is called "preference
reversals".
Moreover, people's preferences, as evidenced by their choices
and decisions in carefully controlled experiments, are
inconsistent. They tend to lose control of their actions or
procrastinate because they place greater importance (i.e.,
greater "weight") on the present and the near future than on the
far future. This makes most people both irrational and
unpredictable.
Either one cannot design an experiment to rigorously and validly
test theorems and conjectures in economics - or something is
very flawed with the intellectual pillars and models of this
field.
Neo-classical economics has failed on several fronts
simultaneously. This multiple failure led to despair and the
re-examination of basic precepts and tenets.
Consider this sample of outstanding issues:
Unlike other economic actors and agents, governments are
accorded a special status and receive special treatment in
economic theory. Government is alternately cast as a saint,
seeking to selflessly maximize social welfare - or as the
villain, seeking to perpetuate and increase its power
ruthlessly, as per public choice theories.
Both views are caricatures of reality. Governments indeed seek
to perpetuate their clout and increase it - but they do so
mostly in order to redistribute income and rarely for
self-enrichment.
Economics also failed until recently to account for the role of
innovation in growth and development. The discipline often
ignored the specific nature of knowledge industries (where
returns increase rather than diminish and network effects
prevail). Thus, current economic thinking is woefully inadequate
to deal with information monopolies (such as Microsoft), path
dependence, and pervasive externalities.
Classic cost/benefit analyses fail to tackle very long term
investment horizons (i.e., periods). Their underlying assumption
- the opportunity cost of delayed consumption - fails when
applied beyond the investor's useful economic life expectancy.
People care less about their grandchildren's future than about
their own. This is because predictions concerned with the far
future are highly uncertain and investors refuse to base current
decisions on fuzzy "what ifs".
This is a problem because many current investments, such as the
fight against global warming, are likely to yield results only
decades hence. There is no effective method of cost/benefit
analysis applicable to such time horizons.
How are consumer choices influenced by advertising and by
pricing? No one seems to have a clear answer. Advertising is
concerned with the dissemination of information. Yet it is also
a signal sent to consumers that a certain product is useful and
qualitative and that the advertiser's stability, longevity, and
profitability are secure. Advertising communicates a long term
commitment to a winning product by a firm with deep pockets.
This is why patrons react to the level of visual exposure to
advertising - regardless of its content.
Humans may be too multi-dimensional and hyper-complex to be
usefully captured by econometric models. These either lack
predictive powers or lapse into logical fallacies, such as the
"omitted variable bias" or "reverse causality". The former is
concerned with important variables unaccounted for - the latter
with reciprocal causation, when every cause is also caused by
its own effect.
These are symptoms of an all-pervasive malaise. Economists are
simply not sure what precisely constitutes their subject matter.
Is economics about the construction and testing of models in
accordance with certain basic assumptions? Or should it revolve
around the mining of data for emerging patterns, rules, and
"laws"?
On the one hand, patterns based on limited - or, worse,
non-recurrent - sets of data form a questionable foundation for
any kind of "science". On the other hand, models based on
assumptions are also in doubt because they are bound to be
replaced by new models with new, hopefully improved, assumptions.
One way around this apparent quagmire is to put human cognition
(i.e., psychology) at the heart of economics. Assuming that
being human is an immutable and knowable constant - it should be
amenable to scientific treatment. "Prospect theory", "bounded
rationality theories", and the study of "hindsight bias" as well
as other cognitive deficiencies are the outcomes of this
approach.
To qualify as science, economic theory must satisfy the
following cumulative conditions:
All-inclusiveness (anamnetic) – It must encompass, integrate,
and incorporate all the facts known about economic behaviour.
Coherence – It must be chronological, structured and causal. It
must explain, for instance, why a certain economic policy leads
to specific economic outcomes - and why. Consistency – It must
be self-consistent. Its sub-"units" cannot contradict one
another or go against the grain of the main "theory". It must
also be consistent with the observed phenomena, both those
related to economics and those pertaining to non-economic human
behaviour. It must adequately cope with irrationality and
cognitive deficits. Logical compatibility – It must not violate
the laws of its internal logic and the rules of logic "out
there", in the real world. Insightfulness – It must cast the
familiar in a new light, mine patterns and rules from big bodies
of data ("data mining"). Its insights must be the inevitable
conclusion of the logic, the language, and the evolution of the
theory. Aesthetic – Economic theory must be both plausible and
"right", beautiful (aesthetic), not cumbersome, not awkward, not
discontinuous, smooth, and so on. Parsimony – The theory must
employ a minimum number of assumptions and entities to explain
the maximum number of observed economic behaviours. Explanatory
Powers – It must explain the behaviour of economic actors, their
decisions, and why economic events develop the way they do.
Predictive (prognostic) Powers – Economic theory must be able to
predict future economic events and trends as well as the future
behaviour of economic actors. Prescriptive Powers – The theory
must yield policy prescriptions, much like physics yields
technology. Economists must develop "economic technology" - a
set of tools, blueprints, rules of thumb, and mechanisms with
the power to change the " economic world". Imposing – It must be
regarded by society as the preferable and guiding organizing
principle in the economic sphere of human behaviour. Elasticity
– Economic theory must possess the intrinsic abilities to self
organize, reorganize, give room to emerging order, accommodate
new data comfortably, and avoid rigid reactions to attacks from
within and from without. Many current economic theories do not
meet these cumulative criteria and are, thus, merely glorified
narratives.
But meeting the above conditions is not enough. Scientific
theories must also pass the crucial hurdles of testability,
verifiability, refutability, falsifiability, and repeatability.
Yet, many economists go as far as to argue that no experiments
can be designed to test the statements of economic theories.
It is difficult - perhaps impossible - to test hypotheses in
economics for four reasons.
Ethical – Experiments would have to involve human subjects,
ignorant of the reasons for the experiments and their aims.
Sometimes even the very existence of an experiment will have to
remain a secret (as with double blind experiments). Some
experiments may involve unpleasant experiences. This is
ethically unacceptable. Design Problems - The design of
experiments in economics is awkward and difficult. Mistakes are
often inevitable, however careful and meticulous the designer of
the experiment is. The Psychological Uncertainty Principle – The
current mental state of a human subject can be (theoretically)
fully known. But the passage of time and, sometimes, the
experiment itself, influence the subject and alter his or her
mental state - a problem known in economic literature as "time
inconsistencies". The very processes of measurement and
observation influence the subject and change it. Uniqueness –
Experiments in economics, therefore, tend to be unique. They
cannot be repeated even when the SAME subjects are involved,
simply because no human subject remains the same for long.
Repeating the experiments with other subjects casts in doubt the
scientific value of the results. The undergeneration of testable
hypotheses – Economic theories do not generate a sufficient
number of hypotheses, which can be subjected to scientific
testing. This has to do with the fabulous (i.e., storytelling)
nature of the discipline. In a way, economics has an affinity
with some private languages. It is a form of art and, as such,
it is self-sufficient and self-contained. If certain structural,
internal constraints and requirements are met – a statement in
economics is deemed to be true even if it does not satisfy
external (scientific) requirements. Thus, the standard theory of
utility is considered valid in economics despite overwhelming
empirical evidence to the contrary - simply because it is
aesthetic and mathematically convenient.
So, what are economic "theories" good for?
Economic "theories" and narratives offer an organizing
principle, a sense of order, predictability, and justice. They
postulate an inexorable drive toward greater welfare and utility
(i.e., the idea of progress). They render our chaotic world
meaningful and make us feel part of a larger whole. Economics
strives to answer the "why’s" and "how’s" of our daily life. It
is dialogic and prescriptive (i.e., provides behavioural
prescriptions). In certain ways, it is akin to religion.
In its catechism, the believer (let's say, a politician) asks:
"Why... (and here follows an economic problem or behaviour)".
The economist answers:
"The situation is like this not because the world is whimsically
cruel, irrational, and arbitrary - but because ... (and here
follows a causal explanation based on an economic model). If you
were to do this or that the situation is bound to improve".
The believer feels reassured by this explanation and by the
explicit affirmation that there is hope providing he follows the
prescriptions. His belief in the existence of linear order and
justice administered by some supreme, transcendental principle
is restored.
This sense of "law and order" is further enhanced when the
theory yields predictions which come true, either because they
are self-fulfilling or because some real "law", or pattern, has
emerged. Alas, this happens rarely. As "The Economist" notes
gloomily, economists have the most disheartening record of
failed predictions - and prescriptions.
About the author:
Sam Vaknin is the author of Malignant Self Love - Narcissism
Revisited and After the Rain - How the West Lost the East. He is
a columnist for Central Europe Review, PopMatters, and eBookWeb
, a United Press International (UPI) Senior Business
Correspondent, and the editor of mental health and Central East
Europe categories in The Open Directory Bellaonline, and
Suite101 .
Visit Sam's Web site at http://samvak.tripod.com
|
|
| |
| |
