Why economics falls short for me

I talk unfavorably about economics here frequently, so let me walk things back a little bit and explain how the lens through which I view things is shaped.

First and foremost, I freely acknowledge that economics does have a value and a purpose. I don’t think I do a very good job of communicating that, because I focus mostly on it’s shortcomings as a discipline. I think that in a technical aspect, a lot of it works out just fine. But that, to me, only extends to textbooks. Once you try to apply the theories to the real world, once they leave the paper, I believe that the human factor muddies things and lessens the predictive value of economic theories.

Before we delve into that, I feel the need to reiterate that there are still real world applications for economics. For example, production and consumption, labor, etc. I won’t be ridiculous and assert that all economics is flawed and has no use. Clearly it does. Now, allow me to elaborate on where I see it getting muddy.

If the basic question at the heart of economics is, “What is the best way to use these resources?” then I think we first must answer the question, “Why do people do the things that they do and what do they value?” Answering the first question is easy–it’s often just a simple matter of mathematics. However, the second question is going to be more complex to answer because of psychology, philosophy, ethics, etc.

For example, perhaps we can figure out mathematically what the most efficient way to use resources is. But suppose that somehow violated our ethics or morality. What then? What is a person to do? Resources might have to be used less efficiently in order to fit morally or ethically in a society or culture.

Similarly, how do we determine what people value? There is no mathematical equation for this. People have basic needs to live and reproduce, to complete their biological functions. But as far as resource allocation goes, that will be directed by what people value, and what people value varies widely and is subjective in nature.

If you take a look at any budget, be it governmental or personal, you will see what people value. Economics did not lead them to those values, though. They made economics work for their values and their philosophies and ethics, NOT vice versa. In other words, you can’t answer the second question, “Why do people do what they do and value what they do,” by simply answering “economics.” And we’ll see why now, using budgets as an example.

If the premise that economics informs values were true, we should in theory see roughly the same proportions of money dedicated to the same things in virtually every budget. But we clearly don’t see that. Let’s take a look at the US budget first:

US budget

Now let’s take a look at the budget of another country, Australia:

australia budget

Different countries form their economic system differently because they answer the, “How do we best use these resources?” question by using their values and ethics, philosophy. And again, these things vary from culture to culture, person to person.

Let’s talk about some more examples of how values and economics are related. Let’s talk about contraception. Planned Parenthood is a hot button issue in America right now, with a lot of politicians and states wanting to defund it. Why do they want to defund it? It isn’t because of economics. Of course it isn’t. Because contraception and it’s impact is something that can be studied, and there’s an ample amount of evidence to show that access to contraception lowers birth rates and disease transmission, and you can generate a dollar amount saved by offering it and a dollar amount needed to budget in order to offer those services. If it were simply a matter of economics, contraception, sex ed, and a whole host of other reproductive health interventions would be no-brainers. Put another way, leaving these programs intact makes more economic sense than getting rid of them.

But the economic decisions are made through the lens of values, particularly religious ones. In many instances, in many states and communities and our congress, religious values supersede economics. Again–economics has not informed or influenced psychology or philosophy or ethics or values here–indeed we see that the opposite is true, that the values and ethics and philosophies again are the things that influence our economics.

And those things can’t be quantified on paper, and they’re the reason why economics often loses much of its sway with me in the real world when you try to apply it. Let me offer another example of where I believe economics fails us: creativity and innovation.

Why do people create? Why do they innovate? Now let’s frame that in an economic context: do market principles like competition and profits cause people to create? Well, now that’s an interesting question. Let’s take it a step further. If we removed those elements of the premise–competition and profit–would people still create? Would they still innovate?

Yes, of course they would, because economic profit and competition aren’t the only kinds of incentives out there. They aren’t even the only kinds of profit and competition out there. And for an example of this we need look no further than Dr. Jonas Salk, the father of the polio vaccine. Dr. Salk refused to patent his vaccine, which meant he missed out on a boat load of money, but also that the vaccine could be widely available and affordable. He believed, in short, that it belonged to the world. But let’s look at that decision through an economic lens, specifically keeping competition, profit, and innovation in mind.

It’s highly arguable that Dr. Salk created the vaccine independent free market incentives. To be clear and fair, a free market system put together the manufacturing and distribution of his work. But “free market competition” and “market shares” and “economic profit” clearly, arguably, did not increase his genius, his desire, or his motivation. In other words, economics did not provide the incentive–personal values and philosophy did.

Let’s go back to the question, “Why do people innovate and create?” and provide two explanations. 1) to make the world a better place/to make life better, and 2) to make money. Now let’s perform a thought experiment.

What if we removed one of the possible reasons? For example, if we removed “making the world better/life easier” would people still create and innovate? Well, that would leave creating and innovating solely for the sake of profit the only remaining option. Now think about a society wherein the only reason to create and innovate would be to create wealth. Could such a society work? Sure, of course it could. People would see needs that were unaddressed and then create accordingly in order to fill that niche, and by doing so would turn a profit.

Now, what if we reversed the thought experiment? What if we took away the profit part, so that “to make the world a better place/make life easier” was the only answer. In such a scenario or society, people who innovate would not be compensated with money for their creations, for their improvements. Would people still do it, then? Yes, of course. Dr. Salk is a prime example of someone with this type of attitude.

As I hope this thought experiment showed in the real world the answer is that both explanations are not mutually exclusive; people create and innovate for both reasons. I’m not trying to say that one or the other is really more correct. I’m merely attempting to illustrate that reducing innovation and creativity down to only economic terms is going to generate an incomplete picture of what actually happens in the real world, and that trying to motivate people to create and innovate using only economic incentives is bound to experience failure. Such a reductionist view misses a lot other very important factors.

And that’s ultimately why economics leaves me dissatisfied as a field of study. Too often economics ignores the human factor, or purports to impact the human factor, somehow mitigating it. Such assertions are false, though. While someone might seem to be motivated by economic factors, that can further be reduced to value and philosophy: a person is only open to economic incentives because of their values. In other words, economics doesn’t create values, values create economics. And until economics does more to take that variable and subjective human factor into account, it’s always going to be quite lacking for me.


7 thoughts on “Why economics falls short for me

  1. Great post Ryan. I love your discussions on economics. It’s actually funny because the other day I was listening to this podcast called the Hidden Brain that I follow and the topic was on behavioral economics and they were talking to a guy named Richard Thaler who is a behavioral economics. I thought of you because I know you’ve tried to explore economics a lot and trying to discover what bothers you about it. And I was saying yesterday, I gotta remember to tell Ryan about this, and then I see this post and I think you’ve discovered the answer all on your own, and this is what Richard Thaler talks about in the podcast. Classic economics theory rests on an axiom that everybody makes decisions based on what is economically most advantageous. As you point out here that’s an out and out lie. Personally I think if we all behaved like classical economic theory we’d actually be even more horrible people. Because if I were to look optimistically at humanity I’d say that sometimes we might make a less economically sound decision if it means helping someone else. That’s comforting to me. Anyway, here is a link to Richard Thaler’s book. It seems like it’s something you would enjoy. http://www.amazon.com/Misbehaving-The-Making-Behavioral-Economics/dp/1501238671

  2. Yes, you have acknowledged economics, I do see this. However, being that they are also scientists, they already realize that every science, especially a social science, has shortcomings. Economists already realize this. Do you know of any other discipline that remains without any shortcomings? No, it is impossible. A lot of it has to do with a lack of data and too many variables with changing (policies that change an entire industry for example). Now, to answer your question of “what is the best way to utilize scarce resources with an unknown amount of worth” and “why people make these choices, what they buy, do, sell and what changes occur when they do?” Yes, it’s economics. It encompasses many different topics but that is the discipline that involves these questions. It uses math, logic, etc as well. Plenty of statistics, too. However, it takes a different lens to see the bigger picture. This is why only using psychology or logic or stats by itself is useless for this topic. It also takes a lot of knowledge from history and policy, to study trends, cohorts of people.
    A good example is that the middle class is not shrinking, but instead, has changed over time. Fewer people live in households, people make more money as individuals. You don’t get that from CNN or Fox news. You get that from research.
    As far your question about what happens if someone violates your rights, or it was hurting someone? That is an easy answer and an answer you probably agree with: government. Yes, government is essential for protecting the consumer and producer alike.
    But as far as a budget is concerned, economics did lead them to decide what they value. Economics is a study, Ryan. People use it every single day. Every day you make a trade off with something else. However, with this very same topic, it also uses what people want, what works with their values, ethics, etc: they call these incentives.
    Now, for comparing budgets between two different countries you have overlooked your generalization between them about their differing “values.” For Australia, it has budgets like general services, social security/welfare as our budget usually defines what the services are. Also, budgets depend on the need of the people, size of the population, size of the budget…here, there’s a massive difference as well.
    As far as planned parenthood goes….I have no idea where this is coming from. Considering the importance of planned parenthood and what it does, I too agree that it is frivolous to defund something like that.
    And to answer your question why people create or innovate? They have the incentive to do so. Usually, people like you that don’t really care for this topic make the generalization that its out of “greed” or just wanting to make money. What is greed? What if someone wanted to invent something for the greater good of people? Wouldn’t it better if people were rewarded for their hardwork? Marxism usually denies someone this right: rewards. And for Dr. Salk, that is his choice. Also, if he patented it, he could have also chosen how much etc it would be. Distribution does cost money, so does production, Ryan. Nothing can simply be for dirt cheap. Otherwise, shortages will happen. Which is even worse because then not enough people get the vaccine or medication. There’s a tradeoff there. It costs more money for the supply to meet the demand but again….it costs more money. That is why prices matter.
    It is easy for you or I, or any government body, to assume or “know” how much something should cost, or why it should cost what it does. But we cant. That’s micromanaging and that’s impossible. That is why virtually every country is moving away from centrally planned economies and mixing more “free trade” into the mix….hint hint….is modeled after the very subject you sometimes dislike at times.
    Now, for your experiment, this is difficult. In fact, you cannot simply do this. You cannot put an idea into a box, with your own biases or taking away key variables of the human thought process. It doesn’t work like that. Maybe this is how you would like it to work, but this is real life and this is how people work. People polluting and hurting people is one thing, and implying that’s what so many people are about is also wrong, which I don’t think you mean by that though.
    Think of this, what if nobody acted in their own self interests, but only of others? Well, that’s an easy answer to your question: we’d all starve to death, make no effort to better ourselves.
    Instead, we do things for our own self interests in a trade off system. Even if you hate economics, you can’t magically make it into something you want.
    Changing people to become more educated, save more money, not buy so much junk, buy less polluting things…. I want those, too. Believe me. However, ignoring this subject means you might as well give up trying to find the issues and solve them. This is THE ONLY topic that includes all of this. There is no other topic or study or discipline that will provide these answers.
    A good example is Noam Chomsky. He’s an intellectual…not know for his background of study though. Instead, he’s known for his politics. He has good ideas, good critiques but he often….like some many other intellectuals….have hardly a basic understanding of economics. Which is why he certainly wrong…almost all of the time. It would be like professional card player being against climate change because he read a study somewhere. He’s an expert card player, but has no background in geology. Or, it could be like a politician with a law degree, making economic decisions…..

    1. I deleted my original reply to this because it was much too sarcastic, and that isn’t what you deserve or what this conversation deserves, so here is take two.

      You and I profoundly disagree about these things, and neither of us is ever going to change the mind of the other. And that’s really as far as I can take this.

      While we will always be friends, I think this is just one area where we’ll have to avoid discussion, because I don’t really believe it’ll ever be productive.

      A lot of your statements and arguments rest upon the idea that people who disagree with your beliefs are ignorant, unenlightened, naive, etc. Look at this conversation–you blatantly told me I don’t know how real life works. I’m not saying this to you as a debater, but rather as a friend. Such comments aren’t productive and they really aren’t even arguments. I’m not here to try and quantitatively determine which beliefs or philosophies are “correct” because quite frankly most if not all of that is entirely subjective.

      So, as a friend, I am saying that I respect your point of view and your input. In the future, if you’re compelled to point out an alternative point of view, please do so with data. I’ll always be open to what you have to show me. I know you’re not actively trying to be condescending or arrogant, so I’m not even upset. Just know that sometimes that’s how your words come off.

      1. It’s not about real life, it’s that you cannot simply impose an experiment with the subject on your terms. If this were the case, we would have solved the great mystery of the world

  3. And to answer your questions about classical liberalism and it’s theories, I would have to say that it is not horrible. Most countries are still trending towards adopting these ideals. Its funny how socialists and anti-capitalists will focus on negative traits of capitalism (which are hardly causes by capitalism itself but government forces causes recessions, etc) but they are also the first to deny that the socialist-inclined (centrally planned) economies are decentralizing due to their nature of not allocating resources properly. Where you think that I am wrong about central planning think critically about this: how in the heck can a government manage and allocate the money and resources for 320 million people, trillions of dollars and goods/services. They already spend too much and don’t budget property. What makes you thinking adding more spending and more government in the mix can help us? We have a capitalist country with a government problem…. You always need government, leadership….but too much doesn’t help but hinder.

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