Who Are We Really?

Behavioural economics finds it's significance from the way it reframes the economic perspective of human beings. We are no longer simply called homo economicus. We are allowed to selfless, confused and cooperative.

But that is not entirely satisfactory. The economic paradigm is still in place. We are still primarily consumers. We exist to consume, and consume to exist. We may occasionally give some of our consumption to others, but our primary purpose is unchanged.

There are, as I see it, two main drivers of this consumption complex. Our philosophical leaders (economists and their mindless followers; politicians) who tell us that consumption is everything. And us, who seemingly have an innate drive to get more stuff. More stuff than we had yesterday, more stuff than our neighbours have today.

The problem is that consumption isn't everything. We are more complex than that. Happiness is not just a function of consumption (c.f. friends, family). We cannot be reduced to one-dimensional, consuming robots.

And if that were not enough to make us think twice, limitless consumption is not actually achievable. Our environment has limits. The planet has limits. There are only so many fish in the sea. As Stewart Wallis (of the think tank the new economics foundation) recently said in a TED talk, we need to move on from seeing ourselves as consumers to stewards. Based purely on pragmatism, a serious change in our self-image is needed.

Meta

After a bit of reading I feel like presenting some interesting ideas regarding the state of economics. I use the paper Evolution, learning and economic behaviour by Reinhard Selten (1991) and the book Basic Instincts by Pete Lunn (2008) (see here for a full book review).

Where has economic thought been?

"It is no exaggeration to say that orthodox economics is based on the idea that people can be treated, for economic purposes, as if they are selfish, independent calculating machines."
(Lunn, p.ix)

Where should we be?

"The insight the economist offers should echo in our minds when we do business with a company, when we decide to take a job, when we choose one product over another or when we walk down the end of our street to take part in and watch economic life." (Lunn, p.3)

Our task?

"If economists are to be criticised it cannot be for simplifying human nature. We have to. The question is not whether human nature is simplified, but whether the particular simplification is the best one available... Thus the economist needs to isolate the most relevant aspects of our natures; to locate the most powerful determinants of our economic behaviour." (Lunn, p.21)

"[E]conomics has many things going for it. Among the social sciences it is the most numerate. It prides itself on analytical rigour and refuses to tolerate the imprecise definitions and rambling arguments that characterise so much of social science. We don't need less economics; we need better economics." (Lunn, p.259)

And in the mean time?

"It is better to make many empirically supported ad hoc assumptions, than to rely on a few unrealistic principles of great generality and elegance." (Selten)

The way forward?

"We know that Bayesian decision theory is not a realistic description of human economic behavior. There is ample evidence for this, but we cannot be satisfied with negative knowledge - knowledge about what human behaviour fails to be. We need more positive knowledge on the structure of
human behaviour. We need quantitative theories of bounded rationality, supported by experimental evidence, which can be used in economic modelling as an alternative to exaggerated rationality assumptions." (Selten)

"The scientific task ahead is to find a concise description of our most powerful instincts, which can be combined to predict our behaviour in individual transactions, in individual markets or organisations, and finally can be built up into bigger models of the economy - a more behaviourally accurate equivalent of competitive equilibrium." (Lunn, p.264)

On a positive note, what does the future hold?

"Good science involves constant interplay between theory and evidence. It is this interplay which causes scientific revolutions - great leaps in our understanding of the world. Is economics about to be revolutionised? If so, what impact might this revolution have?" (Lunn, p.252)

"A new economics, based on a more accurate theory of our economic instincts, and a more accurate idea of the economic environment in which they prevail, is emerging. Our inability to see where it is going is all part of the fun of the ride." (Lunn, p.266)

Book Review: Economyths

Economyths by David Orrell is an accessible critique of economics as we know it, summed up by the following statement:

"Neoclassical economics isn't a theory, it's an excuse."

Orrell attacks economics on ten fronts:

• The economy is more complicated than economics assumes
• The economy is more connected than economics assumes
• The invisible hand cannot explain booms and busts
• Economics cannot predict the future
• Humans are irrational (this chapter covers behavioural economics. While it is only one chapter Orrell successfully weaves it into a larger narrative of disenchantment with neoclassical economics)
• Economics bears all the flaws of a male-dominated discipline
• Economics condones gross inequality
• Economics ignores our dying planet
• Economics cares not for human happiness
• Economics is only sustained by vested interests

Orrell is perceptive when he reasons why Neoclassical economics has lasted so long:

"it tapped into something more enduring... it is based on ideas of unity, stability and symmetry that have characterised Western science since the time of the ancient Greeks." 

And what it promises:

"The neoclassical model for economic growth is unsustainable and unsatisfying, not just because it requires infinite resources and harms the environment, but also because it relies on an eternal desire for more, which can be definition never be satisfied. It offers, not happiness, but the eternal promise of happiness, if we can just work harder and upgrade our lifestyles to the next level before everyone else does."

Part of the solution, according to Orrell, is to open up economics to other disciplines. Let psychologists, philosophers, political scientists, engineers, ecologists, mathematicians and physicists all critique economics. Any economists out there are probably feeling a bit bullied by now, but rest assured the status quo is totally biased in your favour.

Orrell is clearly influenced by Nassim Taleb's The Black Swan (review to follow) - much of it is not original, but that does not stop it from being an engaging argument. I am unsure to what extent I agree with Economyths, but I recommend anyone interested in capitalism or economics read it. There is only a bit on behavioural economics, but it thoroughly reviews the wider context of the economic debate.

Genre: Economics
Accessibility: 8/10
Accuracy: 7/10
Readability: 7/10
Usefulness: 7/10
Verdict: A Good Read

Book review: The Economics of Good and Evil

The Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street by Tomas Sedlacek is quite possibly the most gripping book I have ever read. I found myself reading it late at night, on the toilet and even (gasp) in lectures.

I don't agree with everything Sedlacek writes, but boy has reading his work opened my mind. I could easily fill this review with things I disagree with, but that would miss the point. I don't recommend The Economics of Good and Evil because it is tells the truth, but because it will get you questioning: What is the truth? What is economics? Why do we conduct economics in the way that we do? Why do we persist with economics when it persistently fails to live up to its own expectations? Should economics include the ethics of good and evil? Why must the economy always grow?

What marvels me most about the book is that it deals with complex topics in such a fascinating way. Not once did it lose my interest. If you study, or plan to study, economics at any academic level you MUST read this book. As for the casual reader, I still recommend it, but do not be under any illusions - it does cover economics in-depth. It did take me a while to read (although as I say, I was gripped at every point).

The first half of the book takes a historical perspective of economics, mush of which was new to me (having always been taught that economics did not exist before Adam Smith). The second half of the book takes a more thematic approach (this is less brilliant, but still worth reading). Amongst other concepts, Sedlacek challenges utility, homo economicus, ceteris paribus, the need for growth, mathematics in economics, economics as religion and the invisible hand.

The one complaint with the book that I will mention is Sedlacek's attempt to be a theologian - he is not averse to taking biblical passages out of context - I do not advise using him as a guide to Christianity.

Having only just finished the book I am unsure how much I agree with, but this I do know: I am very glad to have read it and am definitely a better economist for doing so.

Genre: Economics/Meta economics
Accessibility: 6/10
Accuracy: 5/10
Readability: 7/10
Usefulness: 10/10
Verdict: Required Reading for Economists

Religous Economists

Behavioural economics is about improving economics. But why do we want to improve economics? Why is economics important?

Tomas Sedlacek in The Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street (my current bedtime reading) provides the following answer:

"a strong faith in the beneficial effect of material progress is professed by a majority of the key figures of economic thought of our time. This why we must constantly grow, because we (deep down and often implicitly) believe that we are headed toward an (economic) paradise on Earth. Because care for the soul has been replaced by care for external things... economists have become key figures of great importance in our time... They are expected to perform interpretations of reality, give prophetic services (macroeconomic forecasts), reshape reality (mitigate the impacts of the crisis, speed up growth), and, in the long run, provide leadership on the way to the promised land - paradise on Earth."

(p.49)

I am struggling to find good reasons why this might not be true...