| "It is impossible to describe any human action if | | | | it - but they do so mostly in order to redistribute |
| one does not refer to the meaning the actor | | | | income and rarely for self-enrichment.Economics |
| sees in the stimulus as well as in the end his | | | | also failed until recently to account for the role of |
| response is aiming at." --Ludwig von | | | | innovation in growth and development. The |
| MisesEconomics - to the great dismay of | | | | discipline often ignored the specific nature of |
| economists - is merely a branch of psychology. It | | | | knowledge industries (where returns increase |
| deals with individual behaviour and with mass | | | | rather than diminish and network effects prevail). |
| behaviour. Many of its practitioners sought to | | | | Thus, current economic thinking is woefully |
| disguise its nature as a social science by applying | | | | inadequate to deal with information monopolies |
| complex mathematics where common sense and | | | | (such as Microsoft), path dependence, and |
| direct experimentation would have yielded far | | | | pervasive externalities.Classic cost/benefit |
| better results.The outcome has been an | | | | analyses fail to tackle very long term investment |
| embarrassing divorce between economic theory | | | | horizons (i.e., periods). Their underlying assumption |
| and its subjects.The economic actor is assumed | | | | - the opportunity cost of delayed consumption - |
| to be constantly engaged in the rational pursuit of | | | | fails when applied beyond the investor's useful |
| self interest. This is not a realistic model - merely | | | | economic life expectancy. People care less about |
| a useful approximation. According to this latter | | | | their grandchildren's future than about their own. |
| day - rational - version of the dismal science, | | | | This is because predictions concerned with the far |
| people refrain from repeating their mistakes | | | | future are highly uncertain and investors refuse to |
| systematically. They seek to optimize their | | | | base current decisions on fuzzy "what ifs".This is a |
| preferences. Altruism can be such a preference, | | | | problem because many current investments, such |
| as well.Still, many people are non-rational or only | | | | as the fight against global warming, are likely to |
| nearly rational in certain situations. And the | | | | yield results only decades hence. There is no |
| definition of "self-interest" as the pursuit of the | | | | effective method of cost/benefit analysis |
| fulfillment of preferences is a tautology.The | | | | applicable to such time horizons.How are |
| theory fails to predict important phenomena such | | | | consumer choices influenced by advertising and by |
| as "strong reciprocity" - the propensity to | | | | pricing? No one seems to have a clear answer. |
| "irrationally" sacrifice resources to reward | | | | Advertising is concerned with the dissemination of |
| forthcoming collaborators and punish free-riders. It | | | | information. Yet it is also a signal sent to |
| even fails to account for simpler forms of | | | | consumers that a certain product is useful and |
| apparent selflessness, such as reciprocal altruism | | | | qualitative and that the advertiser's stability, |
| (motivated by hopes of reciprocal benevolent | | | | longevity, and profitability are secure. Advertising |
| treatment in the future).Even the authoritative | | | | communicates a long term commitment to a |
| and mainstream 1995 "Handbook of Experimental | | | | winning product by a firm with deep pockets. This |
| Economics", by John Hagel and Alvin Roth (eds.) | | | | is why patrons react to the level of visual |
| admits that people do not behave in accordance | | | | exposure to advertising - regardless of its |
| with the predictions of basic economic theories, | | | | content.Humans may be too multi-dimensional and |
| such as the standard theory of utility and the | | | | hyper-complex to be usefully captured by |
| theory of general equilibrium. Irritatingly for | | | | econometric models. These either lack predictive |
| economists, people change their preferences | | | | powers or lapse into logical fallacies, such as the |
| mysteriously and irrationally. This is called | | | | "omitted variable bias" or "reverse causality". The |
| "preference reversals".Moreover, people's | | | | former is concerned with important variables |
| preferences, as evidenced by their choices and | | | | unaccounted for - the latter with reciprocal |
| decisions in carefully controlled experiments, are | | | | causation, when every cause is also caused by its |
| inconsistent. They tend to lose control of their | | | | own effect.These are symptoms of an |
| actions or procrastinate because they place | | | | all-pervasive malaise. Economists are simply not |
| greater importance (i.e., greater "weight") on the | | | | sure what precisely constitutes their subject |
| present and the near future than on the far | | | | matter. Is economics about the construction and |
| future. This makes most people both irrational and | | | | testing of models in accordance with certain basic |
| unpredictable.Either one cannot design an | | | | assumptions? Or should it revolve around the |
| experiment to rigorously and validly test | | | | mining of data for emerging patterns, rules, and |
| theorems and conjectures in economics - or | | | | "laws"?On the one hand, patterns based on limited |
| something is very flawed with the intellectual pillars | | | | - or, worse, non-recurrent - sets of data form a |
| and models of this field.Neo-classical economics | | | | questionable foundation for any kind of "science". |
| has failed on several fronts simultaneously. This | | | | On the other hand, models based on assumptions |
| multiple failure led to despair and the | | | | are also in doubt because they are bound to be |
| re-examination of basic precepts and | | | | replaced by new models with new, hopefully |
| tenets.Consider this sample of outstanding | | | | improved, assumptions.One way around this |
| issues:Unlike other economic actors and agents, | | | | apparent quagmire is to put human cognition (i.e., |
| governments are accorded a special status and | | | | psychology) at the heart of economics. Assuming |
| receive special treatment in economic theory. | | | | that being human is an immutable and knowable |
| Government is alternately cast as a saint, seeking | | | | constant - it should be amenable to scientific |
| to selflessly maximize social welfare - or as the | | | | treatment. "Prospect theory", "bounded rationality |
| villain, seeking to perpetuate and increase its | | | | theories", and the study of "hindsight bias" as well |
| power ruthlessly, as per public choice theories.Both | | | | as other cognitive deficiencies are the outcomes |
| views are caricatures of reality. Governments | | | | of this approach. |
| indeed seek to perpetuate their clout and increase | | | | |