A thought on economics

The beautiful, yet complicated, aspect of economics is the fact that preferences of people are different in different contexts.

The study of economics is based on three assumptions:

  1. Methodological individualism—where the individual is the unit of analysis. Economics evolves from individual action and interactions between those individuals.
  2. Purposive action—where individuals act purposefully to satisfy their wants. We can call this a type of “soft self-interest.”
  3. Economizing behavior—where individuals seek ends based on cost and benefits from their own individual perspectives. This is where subjectivity becomes an important player.

If we can all agree on these three assumed pillars of the discipline, we can easily see where things can get complicated from a policy standpoint. We are an imperfect people in an imperfect world. One aspect of decision-making that brings to light how difficult it is to actually plan an economy by regulating particular industries, controlling resources and fixing prices amongst other things, is the “Fundamental Attribution Error”. This is where people make the mistake of overestimating the importance of fundamental character traits, or tendencies, and underestimates the importance of the situation and context.

For example, in one experiment, a group of people are told to watch two sets of closing2-580x431basketball players of comparable abilities, the first of whom are shooting baskets in a gym with the lights on and the second of whom are shooting baskets in a gym with the lights turned off (unsurprisingly, missing a bunch of shots.) Then, the people were asked to judge how good the sets of players were. Naturally, the players in the well-lighted gym were considered superior. 

Or, how we judge a woman that is hostile, and fiercely independent in one scenario, but passive and warm in another scenario. We tend to label the woman as one of these, with the other being either a facade or a surface of some type. Why can’t the woman be all of these things, and it really comes down to the context, or situation, in which she finds herself immersed.¹

Economists often miss out on this, especially when it comes to government intervention, because they fail to clearly identify the institutions that lead for a market transaction to take place in a particular manner. Sure, there are some obvious seen institutional factors, but what about the unseen? What about the institutions of the individual? The purposive action? The “economizing behavior” that is laden with subjectivity?

How can economists actually believe they have some sort of prescription to a problem they cannot even measure or simply know without asking each market participant?

Economics, if studied correctly, can overcome this error, but will still fail to find a solution to the problem of allocative efficiency in light of the fact that situations and contexts vary across all individuals.

So the next time you find yourself thinking the government should do something about any “problem” you find yourself analyzing, just think about how often people make the same decision with under different situations, or alternatively, how they will make a different decision under the same circumstances. Government(s) will not solve anything. It will always help one group of people at the expense of the other. At best, it might get lucky and help the majority, in which a minority is still harmed. Let’s hope that minority isn’t you.

(1) Malcolm Gladwell, “The Tipping Point” p. 160-162

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