Tuesday, November 25, 2008

Some Thoughts on Economics

I recently heard a behavioral economist talking about a study of consumer preference. Researchers gave consumers a choice of two items. The items varied - sometimes two scarves that were different shapes and colors, sometimes two pairs of socks that were just different colors, other sorts of things. They asked the subjects which they preferred and why. What they found was that, in a significant number of cases, the subjects chose the item on the right. And they found that the subject's stated reason for their preference was never the location of the item; subjects always thought they had another reason, like preferring the color or texture.

In part, this is one of those "gee wiz" findings that doesn't bear closer examination. The finding that consumers pick the item on the right is not a universal law of consumer behavior. They might tend to pick the item on the right in some cases, but they don't always do it. If they did, shopkeepers would have to be constantly scurrying around refilling the right side of display tables. Plus, consumers have certain criteria that they can't ignore, like clothing size. It is unlikely that the phenomenon pertains to car purchases. It might, in fact, only exist in test subjects who aren't really buying anything and are presented with two nearly identical items – economic studies.

This finding (if sufficiently significant) may be of interest to marketers. For economists, it has some broader and more troubling implications. If consumer decisions are irrational (in the sense that you can't predict them based on economic criteria like price and quantity) then the theory of supply and demand doesn’t hold up.

But anyway, we all already know instinctively that microeconomics is hooey. You can use mathematical modeling and game theory to argue what people should do, but that does not justify claims that they describe what people do do. It is clear that a lot of economic theories are backwards-modeled: an economist observes a behavior and finds a way to model it, rather than uncovering behavior through a model. The modeling is at best window dressing and at worst a disingenuous justification for an ideological position.

(This reminds me a bit of a problem I've always had with psychology: if schizophrenia is a chemical imbalance, why are schizophrenics made to do psychotherapy delving into childhood problems and so forth? Why not just rely on medication and therapy to help the schizophrenic cope? Everyone has childhood problems they could dredge up; is the benefit of doing so simply to achieve catharsis? Couldn't the doctor help patients more by creating a catharsis that didn't involve causing conflict with the main support group for the patient (their families)? Perhaps they could induce catharsis with fictional means, such as books or movies? Since psychologists don’t rely solely on drugs, it seems that they don’t solely believe their theory of chemical imbalance.)

So much of social science is a construct of models that seek to explain human behavior, and so much of it seems to be wrong-headed. The science breaks down both in its premises and its proof. The premises are too simplistic to make sense, and most statistics that we use to prove our models in fact prove nothing, because correlation cannot prove causation.

When you study economics, much of the coursework is simple indoctrination. You are taught that competition is efficient, and if you want to earn an A you repeat it on your tests. A lot of smart people have trouble with Econ 101 because it doesn't make sense. Both micro and macroeconomics are taught in every year of college, and the classes tend to become increasingly mathematical, but not to progress in sophistication. First comes the indoctrination, and then the mathematical complexity that creates its own world. Instead of training students to have greater levels of insight, in most cases it seems to destroy common sense and replace it with very muddled thinking.

1 comment:

WesternGrit said...

And when you have someone indoctrinated into the "Calgary School", you have our current economic situation - being crippled from acting to help Canadians...

; )