Mere Economics Isn't - Psychology
In this series of posts, I'll describe five things that mere economics is not. Note, this post was written with Scott Burns and was originally published at The Independent Institute.
Legend has it that an art collector once asked Michaelangelo to describe the challenges he faced in sculpting one of his most iconic works.
“It was actually quite easy,” Michaelangelo drolly replied, “I just chipped away the parts of the stone that didn’t look like David.”
The story may be apocryphal, but we’ve found the great artist’s strategy helpful in communicating the essence of economics to our freshman students.
Much of the learning in Econ 101 is subtractive. It consists in removing false notions about what economics is and the sorts of claims economists can make. By gradually chiseling away the things that economics is not, the true nature of what economics is and what insights it can provide come into sharp relief.
In that spirit, here are five things that economics isn’t.
Psychology
Critics routinely accuse economists of making unrealistic assumptions about human psychology.
In particular, they often dispute economists’ insistence that human beings are rational. (Perhaps confusion would dissipate if a different word had prevailed, but we only report on the rules—we don’t write them!)
By “rational,” economists don’t mean to imply that people are omniscient (if they were, economics would be of little value). Nor do we mean to suggest that they are Vulcan-like cyborgs who absorb all information to perfectly calculate the cost and benefits of every action. Such a wooden anthropology doesn’t describe anyone we know.
Instead, economists mean only that people are purposive. They are goal-oriented beings who use what they believe are the best means available to achieve their desired ends.
Rationality doesn’t preclude error or regret. Indeed, a big part of economics is explaining why people make what they later judge to be mistakes and the process through which markets help them correct those errors.
But purposive beings don’t act randomly like atoms colliding in the quantum realm. They have goals and act with intent to achieve them.
Rationality also doesn’t imply that people are (or ought to be) “selfish” or “self-absorbed,” as critics contend. Rather, rationality means that people pursue their own goals, however they choose to define them.
Economists readily acknowledge that most people do care about more than maximizing profits or amassing a vast personal fortune. People’s demonstrated choices reveal that they pursue many non-monetary goals, like the well-being of others (family, friends, etc.) or spiritual edification.
People have goals. But beyond that, economics is completely silent on cognitive psychology—the inner workings of the human mind.
Too often, admissions like this get interpreted as economists dismissing important matters of cognition, perception, and physiology. Far from it, this is an attempt at intellectual humility.
Economists aren’t interested in cosplaying as psychiatrists or psychologists. We are quite content to leave these questions to experts in other disciplines. Why some people perceive what others don’t, are impulsive or resilient, are self-absorbed or outwardly-focused, etc., are all important questions. They’re just not ones that economics can answer.
Rationality, while seemingly simple, undergirds one of the most important ideas in economics: people respond to incentives.
Why does mandating seat belts lead to higher traffic fatality rates? Changing the rules shifts the costs and benefits people face.
Seat belts lower the cost of reckless driving, thereby incentivizing more of it. A reckless driver wearing a seat belt might escape a horrendous accident with only minor injuries. However, the cyclist or pedestrian he hits probably won’t be so lucky.
In short, economics doesn’t explain the psychology of why people like what they like (i.e., why do some men really like fast cars?). But it does explain how the incentives and constraints people face influence how they behave.