Monday, August 29, 2016

Correcting Errors in Classical Economics

I have an education in economics from University of Virginia. I have found economic concepts to be useful in many areas besides economics, and I have been applying them to such matters as how to create rightful incentives within society on gender relations. Upon further reflection, I have also seen any number of ways in which classical economics is incomplete.

One major problem with classical economics is that it fails to acknowledge the role of science in producing business prosperity. Most of what business sells comes from science. The scientist does not make much money from the knowledge that he produces; but business makes tons of money from that knowledge. The scientist is not properly compensated for the work that he does; the businessman gets far more than his fair share. What this means at the political level is that prosperity is owed as much to the scientist as it is owed to the businessman, and while business certainly has a vast role in creating prosperity the same is owed to an equal or greater extent to science.

Another problem is the belief that people's consumption decisions are driven by rational self-interest. While some consumption decisions are in fact driven by that, there are any number of others that are not rational at all. We see people gorging themselves on bad food until they get diabetes. We see people gambling away their savings or using all the money they have to buy drugs. We see already-beautiful women paying huge sums of money to keep coming back for plastic surgery treatments. None of these behaviors are remotely rational.

There are other consumer behaviors not as obviously extreme that are irrational as well. It is irrational to spend lots of money on clothes because they are in fashion when one can get good enough clothes for one tenth the price. It is irrational for people in a supposedly free country to wear the same clothes, buy the same brand of car or live in the same kind of house as one's neighbors in order to conform to their expectations. It is irrational to buy a huge house and spend all one's life paying it off just because it is a status symbol. These behaviors may be understandable, but they are not rational. They are driven by psychology.

And from what I have seen, at least as many consumption behaviors – if not more – are due to psychology rather than rational self-interest.

Finally, there is the claim that market mechanisms select for the best product. That likewise is not always the case. There have been many situations in which the inferior product dominated the marketplace. We see that with fast food chains vs. Mom and Pop shops; with VHS vs. Beta; with Microsoft vs. Borland. In all these cases, an inferior product rose to market dominance by virtue of either superior marketing or a smarter business strategy.

This reinforces – again – the role of psychology in economics. Psychology is used extensively in marketing and market research. Psychology is a science as well; which adds more to the observation as to just how much business owes to science.

And then there is of course the role of government Interstate system and government protection of property rights.

Should we throw out classical economics entirely? No, merely show just how easily it can be taken into a wrong direction. The people who claim to defend economic opportunity and prosperity in the same sentence as they attack “liberal academia” are either conmen or else they have been conned themselves. The people who use classical economics to justify using psychological manipulation to push on people an inferior product are violating the central claim of classical economics. And the people who use people's fears and insecurities to sell them things that are bad for them and make tons of money in the process have no business claiming to speak for Christian or American values.

Capitalism is a human phenomenon, and any human phenomenon is capable of producing both good and bad results. It does not deserve to be either deified or demonized. It should be encouraged when it produces beneficial results, and it should be corrected when it is used for wrong ends. Perhaps the best way to accomplish the latter without involving large-scale government action is to steer people who are vulnerable to being conned away from the control of the people who want to con them. And it is to inform people enough about both economics and psychology so that they can avoid being prey of unscrupulous people who use classical economics to justify destructive behavior.


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