Home > Uncategorized > The flawed premises of mainstream​ economic theory

The flawed premises of mainstream​ economic theory

from Lars Syll

Misbehaving.inddYou know, and I know, that we do not live in a world of Econs. We live in a world of Humans. And since most economists are also human, they also know that they do not live in a world of Econs …

Nevertheless, this model of economic behavior based on a population consisting only of Econs has flourished, raising economics to that pinnacle of influence on which it now rests. Critiques over the years have been brushed aside with a gauntlet of poor excuses and implausible alternative explanations of embarrassing empirical evidence …

It is time to stop making excuses. We need an enriched approach to doing economic research, one that acknowledges the existence and relevance of Humans. The good news is that we do not need to throw away everything we know about how economies and markets work. Theories based on the assumption that everyone is an Econ should not be discarded. They remain useful as starting points for more realistic models. And in some special circumstances, such as when the problems people have to solve are easy or when the actors in the economy have the relevant highly specialized skills, then models of Econs may provide a good approximation of what happens in the real world. But as we will see, those situations are the exception rather than the rule.

  1. February 10, 2018 at 12:27 am

    I’m curious – are you posting this to express agreement, or to express your amusement that even while Richard Thaler rejects the idea of Humans as Econs, he still thinks this should remain the starting point for more realistic models?

    To amuse myself, I recently listed some other modes of human behaviour that impact our economies, as well as “rational”. I welcome more contributions!

    1. Being rational.
    2. Being a bull. Being irrationally hopeful, having euphoric moments when magical belief suspends rational analysis. Being overconfident in good times, forgetting history, making risky investments.
    3. Being a bear. Acting more cautiously than rational analysis would suggest is sensible.
    4. Being a bully. Using reason, deceit and power to overcome someone else’s reason.
    5. Being kind. Over-ruling rationality to help someone who is in need.
    6. Being loyal. Sticking with a previous habit rather than change for a rational reason.
    7. Being gullible. Lacking the willpower or information needed to act rationally.
    8. Being stubborn. Rejecting a rational explanation that implies personal error, blame, ignorance, stupidity or unethical behaviour.
    9. Being poorly informed. Lacking the information needed to make a rational decision.
    10. Being stupid. Lacking the intelligence needed to make a rational decision.
    11. Being folksy. Basing a decision on a personal rule-of-thumb, rather than rational analysis.
    12. Being proud. Enjoying prestige among peers, acting to sustain prestige rather than act rationally.
    13. Being a loss-chaser. Putting good money after bad in an attempt to recoup losses, however irrational.
    14. Being a story-lover. Acting based on a good narrative rather than a rational explanation.
    15. Being impulsive. Preferring a benefit today to a benefit next year, when next year makes rational sense.
    16. Being a procrastinator. Deferring costs, even though a delay will increase the cost.

    • February 10, 2018 at 8:40 am

      I sure think that Thaler has many valuable observations re mainstream economics and its lack of relevant and realistic behavioural foundations — but I certainly do NOT think the criticized theory should remain the starting point for more realistic models.
      On my own view on the ’empirical’/behavioural turn in economics https://larspsyll.wordpress.com/2015/12/23/dani-rodrik-and-the-empirical-turn-in-economics-vii/

    • Rob Reno
      February 10, 2018 at 10:25 pm

      Live the list :-)

    • Rob Reno
      February 10, 2018 at 10:32 pm

      Love the list. I would modify #6 slightly.

      6. Being habitual. Sticking with a previous habit rather than change for a rational reason.

  2. February 10, 2018 at 1:21 am

    People worked hard (?) and accumulated a lot of energy as reserve. The accumulated energy is also passed on to next generation. Some of them do not know what to do with that huge reserve energy. On the other hand, some people do not have accumulated energy or they have less. Somehow, we allowed this to happen and that is the reality.

    Every economics student is taught that resources are limited. So people work hard (?) to possess this limited resources or even try to explore resources elsewhere (!) because the idea of limited resources stuck to their mind. If resources are infinite and if we need not worry about the future availability of resources our behavior might change. I think we should go in that direction.

  3. February 10, 2018 at 5:43 am

    I’ve found it interesting that behavioral economists like Thaler have focused their attention on “decision-making”, specifically, on an effort to identify those variables which ultimately influence the economic decisions that people arrive at. All well and good.

    What is missing from this approach is a fundamental ontological foundation from which one might derive those crucial not-for-profit motivations—ignored by mainstream economic theorists—which can override the profit-maximization assumptions that so many models are based on.

    I propose that this foundation can be derived from what is probably the first observation we make upon noticing that we exist, viz., that this “life” experience constantly exposes us to the ‘pressure’ of pain and pleasure.

    It is our experiences with pain and pleasure which ultimately informs us that we humans have a collection of NEEDS to deal with, which are understood to be the ultimate source of any and all pain and pleasure that we experience in this life.

    My definition of NEED is quite different from that which is currently embraced by most behavioral scientists…most notably, in that my definition makes no mention whatsoever of the word “survival.” My definition is derived solely from our experiences with pain and pleasure.

    I define a need as that which—when satisfied—causes the host to experience some form of of pleasure or satisfaction or relief from pain, and/or—when deprived of satisfaction—causes the host to experience some form of pain or discomfort.

    We can correctly say that we have experienced the pleasure of need-satisfaction whenever we’ve felt joy, ecstasy, hope, pride, contentment, security, or even just a feeling of being ‘complete.’ The pain of need-deprivation is experienced whenever we’ve felt agony, anguish, boredom, ennui, angst, or even just a feeling that ‘something’s missing.’

    Our needs are imposed on us as a condition of our existence. What this means is that there are no needs—no painful/pleasurable experiences—which humans experience that are “chosen” into, or out of, existence. They are externally imposed upon us (external to our Will, that is).

    (One important implication of this is the way it annihilates Sartre’s collection of existentialist assumptions. There is no “freedom” from needs. We are not able to create our own needs, nor our own values. In fact, because all humans have precisely the same needs as a condition of their existence, they all necessarily have the same values. Yes, we may differ in our perceptions of what our need are and how to best arrange for their overall satisfaction, but the actual needs that humans must deal with are all the same. The only freedom the Will has is the freedom to choose not to get a need satisfied, i.e., to endure the pain of need-deprivation, which is not an insignificant “power” of the Will, but it in no way gives any human the power to create or annihilate hiser needs, the source of all the pain and pleasure and meaning and purpose we humans experience. We are not “condemned to be free” but are rather content within our fully defined purpose, which is to find the ideal satisfaction of a collection of needs—physical, mental, emotional—in order to optimize your Happiness within a collective of other humans seeking the same Happiness for themselves.)

    I would suggest that this particular line of argument gives us a rational basis for insisting upon the universality of human needs. Relativism begone!

    Upon this ontological foundation, I have developed a body of analysis which focuses on those human needs which can best be described as mental or emotional in nature.

    Let us first acknowledge that a good many of the needs that humans must deal with in their lives are properly described as ‘purely biological.’ They generate pain/pleasure that we feel physically, traceable to a particular location within our bodily tissues.

    But humans also experience other needs that are purely ‘mental’ or ’emotional’ in nature. The pain that these needs generate is not associated with any kind of tissue damage.

    When we experience the emotional pain of ‘hurt feelings’, it may not be possible to point to any physical wound, but when our feelings are hurt, there is little doubt in our minds that we have experienced something that is thoroughly undesirable. We call that undesirable ‘something’ pain.

    One of the most important of these mental/emotional needs is our fundamental and intrinsic need for the APPROVAL of other human beings. It is a need that is different from our purely biological needs in some special ways.

    It appears to be an “open-ended” need in that there is no point of homeostasis at which it is finally satisfied. We can enjoy approval from every imaginable source all day long and still feel hurt by disapproval at the end of the day. More approval received always continues to feel good.

    But it’s not just a lack of approval that causes emotional pain, even though that eventuality is certainly painful in its own right (loneliness). Expressed disapproval seems to dramatically aggravate the need, often inflicting acute emotional pain (embarrassment, ridicule, rejection).

    But it’s not just a need to avoid disapproval. Expressed approval feels so good, we are always eager for more. It is a need that can be satisfied and/or deprived through many different forms of expression in many different types of situations. It is quite simply the single most important need that we experience in our lives.

    No surprise, then, that it ought to be prominently featured in the theoretical models of economists who say they want to account for all of the important motivational variables that affect the economic behavior of human beings.

    While we are economic beings, we are also emotional beings who can be hurt by the disapproval of other members of the tribe.

    Fear of the disapproval of most tribe members should be recognized as a not-to-be-dismissed motivational variable which could rationally be expected to incentivize a rich person to either forego avaricious profit-seeking behaviors or perhaps to find ways to optimize the welfare of those on the bottom half of the economic ladder in order to earn their approval.

    • February 10, 2018 at 9:05 am

      Chesterton puts this in its place rather more briefly: “the old utilitarian test of pleasure (clumsy, of course and easily misstated”.

      Interpreting Thaler’s ECONS with Hume’s billiard balls and HUMANs with linguistic animals, my own position is that what makes our economies human is their basis in communication, and our brains forming parts of the communication channels. Economics should be based on what is both necessary and possible, Mathivananpalraj referring to the first and Algol68’s use of the typed logic, of properly defined and therefore testable concepts, to the second.

    • February 10, 2018 at 1:06 pm

      The subject of human needs/motivations is a popular topic for psychologists, especially clinical psychologists. The most well-known expression of these is by Abraham Maslow. Published in a paper shortly before the end of WW2 the paper began a discussion that continues to this day. It made famous Maslow’s pyramid of needs.


      Historically, there is an obvious connection between these needs and the war just conclude, when so many were grossly not met or deliberately denied to people.

      Maslow’s hierarchy is often the guide for discussions about development, concern for the environment and consumerism. Still, the hierarchy shares the same major flaw as modern economics — it often doesn’t fit human behavior. Geoffrey Miller lays out the issue like this in his book, “Spent: Sex, Evolution, and Consumer Behavior.”

      It does not “cut nature at the joints” in terms of the key selection pressures that shaped human behavior: survival and reproduction. Survival includes most of Maslow’s physiological needs (breathing, eating), but also some of the more concrete safety needs (avoiding harm from predators, parasites, sexual rivals, and hostile tribes), social needs (building relations with family, friends, and mates who can help feed, protect, and heal you under adverse conditions), cognitive needs (to learn about survival-increasing opportunities and survival-reducing dangers), and even aesthetic needs (to find a propitious landscape for one’s clan to live in, to make weapons that are serviceably symmetric, strong, and sharp). Reproductive challenges, including finding high-quality sexual partners and raising high-quality offspring, encompass one of the key physiological needs (having sex) and most of the other social, esteem, cognitive, aesthetic, and self-actualization needs.

      [A] branch of evolutionary theory called “life history theory” points out that there are often tough trade-offs between these survival and reproductive priorities. The lower-level needs do not always take priority. For example, male elephant seals will often starve to death during a breeding season while guarding their harems. If elephant seals could talk, … they might explain that they were giving up a physiological need (to eat) for three higher needs: a social need (to feel intimacy and belonging with each of many females), an aesthetic need (to be surrounded by beautiful—that is, fine, fit, fat, fertile—females), and a self-actualization need (to be the best elephant seal one can be, as demonstrated through biting, mauling, bloodying, and excluding all male sexual rivals from one’s beach-front harem). But these last three Maslovian needs can be reduced to reproductive benefits. Natural selection crafted social, aesthetic, and self-actualization motivations because they yielded higher reproductive success over thousands of generations of elephant seal evolution. Male elephant seals who were “slackers,” content to fulfill their survival and safety needs without conflict, would have avoided the bloody beach sites where more ambitious “status seekers” fought, copulated, starved, and died. The slacker seals may have been perfectly happy, and might have even turned vegan and ate plankton, but they did not leave any descendants to inherit their easygoing temperaments. Only the male seals that were willing to compete for dominance, status, and harems, even at the cost of their own lives, sired any offspring.

      Shows that neither Maslow (or psychologists generally) nor current mainstream economists understand either evolution or the history of human cultures. It’s time this deficiency is remedied.

      • February 10, 2018 at 3:09 pm

        Still, the [Maslow] hierarchy shares the same major flaw as modern economics — it often doesn’t fit human behavior.

        Maslow’s hierarchy became popular because it did capture a feature of this life that is intuitively obvious to us all: that sometimes the satisfaction of a particular need is more important to us than the satisfaction of other needs.

        What makes this a very interesting topic is when we consider the astonishing fact that hunger strikers have in the past willfully chosen to deny themselves the satisfaction of certain primary needs necessary for survival—sometimes even to the point of death—all because certain “higher needs” (like our felt need for justice) were more important to them than even their lives.

        The key question that psychologists and biologists need to ask themselves is how such demonstrations of The Will are even possible, if we are pure products of genetic coding and nothing more?

        How can a genetic program actually allow for instances of absolute defiance of the teleological end that our observable “purely biological” needs are clearly designed to serve? (I have an answer, but space does not allow at this time…)

        This demonstrated ability of humans to say “No” to the demands of their biological needs—even to the point of death—is philosophically important, for it is the ONLY evidence we have that such a thing as a “Free Will” is possible.

        It is the one thing we can point to that allows us to challenge the broad assumptions of mechanism, the belief that all of our choices/behavior are/is pre-determined.

        My problem with Maslow’s hierarchy is that it did not adequately underscore the importance of certain of our mental needs over and above our instinctive biological urges.

        We have the example of soldiers willfully choosing to submit themselves to possible death and/or extremely painful bodily injuries simply because their desire to earn approval, and to avoid disapproval (for being a ‘coward’) is ultimately more appealing to them.

        And then there is the example of the many humans who—having become convinced that they will never be able to escape the pain of humiliation for some misbehavior—have chosen to commit suicide rather than endure the mental pain that their need for approval is inflicting on them.

        Maslow’s hierarchy is helpful, but ultimately fails to address the overarching importance of the mental/emotional needs that constantly pressure humans in non-primitive circumstances to act the way they do…

      • February 11, 2018 at 5:24 am

        James, the basic disconnect between Maslow (and all psychologists), and evolution and culture is that the former emphasize needs from the location of the individual human while the latter emphasizes needs from the scene of biological and cultural change. This leads to many consequences.

        The key question you set forth shows a misunderstanding of both genetic evolution and cultural change. Genetic possibilities for humans is broad and multilayered. Which means human actions based on genetics are both broad and variable. They range from the sociopathic to self-sacrificing, from murderers to saints. But this is not evolution. As the story of the elephant seals points out, it is reproducing that matters. Evolution is worked out through reproduction. The genes that are carried through to future generations is evolution. If the murders have the most offspring those genetic codes are passed along. Fewer offspring mean less chance of impacting future generations. But evolution is not an all or nothing process. It’s an average effects process. So, even minority contributors to the genetics of future generations may impact future actions. Genetics determine the hierarchy of one’s needs, in combination with one’s cultural socialization. Not in a universal hierarchy such as Maslow’s. The observed capability of humans to say “no” to the demands of their biological needs—even to the point of death is the result of this combination. As is mental illness, physical illness, tolerance, prejudice, hatred, etc.

      • February 11, 2018 at 9:43 pm

        It is not my purpose, Ken, to attack the concept of evolution (even though I agree with those who point out that teleological arguments are very problematic).

        Indeed, I’ve been developing a thesis that sexual inhibitions became a feature of most civilizations around the world—irrespective of religious traditions—for the simple reason that the tribes that inculcated them were the ones that survived.

        The tribes that adopted these mores from the ones that already embraced them ended up surviving while those that did not, did not survive.

        It is a concept which challenges the fairly common notion out there that religions are the source of sexual inhibitions.

        (Sure, they play a role in perpetuating sexual inhibitions, but I argue that sexual inhibitions originally surfaced in tribes that had not yet developed religious explanations of their life experience. Instead, I suggest that they arose from a recognition—by ‘responsible’ tribal leaders—that the unrestrained pursuit of pleasure can be a threat to the tribe, i.e., lead to undesirable consequences when/if all members of the tribe were to accept no restraints on their sexual “impulses.”)

        Now, of course, we live at a time when strong sexual inhibitions may no longer be needed in order to guarantee the survival of our species. Even without marriage or even any desire to reproduce, science appears able to give us a means to guarantee that new generations of sex-obsessed pleasure seekers will continue to be generated (perhaps only as sex objects for their parents).

        Although I won’t be around to see it, the next couple of centuries could usher in a much more “brave” world than anyone could have expected only a couple of centuries ago.

        Re: my comment…

        The key question that psychologists and biologists need to ask themselves is how such demonstrations of The Will are even possible, if we are pure products of genetic coding and nothing more?

        My purpose here, Ken, was not to express criticism of the teleological focus of most evolutionary biologists, but rather to suggest to them that there is a way to explain how it is possible for human Minds to override programmed instinctive responses that they may never have considered.

        It may not be the sort of topic that evolutionary biologists commonly focus on, but I assume they have a basic desire to understand those curiosities in this life which appear at first glance to be anomalous departures from standard assumptions.

      • February 14, 2018 at 8:26 am

        James, I retract my earlier statements about you misunderstanding. This is a good anthropological analysis for a non-anthropologist. It’s like the explanation some cultural anthropologists outline about the advent of monarchy and the invention of the big seasonal festivals of human cultures. They conjecture that both came into existence just after Sapiens changed to a sedentary agricultural way of life. They made up for what was lost by Sapiens with this change. Monarchy provided the stability and predictability that was part of hunter-gatherer life but was lost with the invention of agricultural communities. Monarchy helped assuage the fear in making the transition. Festivals helped make agricultural life optimistic and exciting, much like the celebrations and close personal relations involved with the constant movement and search for food of hunter-gatherer life.

        One error in what you write. No evolutionist (biologist, anthropologist, etc.) would ever depict evolution as teleological. Evolution is a genuinely a crap shoot. Genomes are random. Some reproduce (and thus survive) while others do not. That’s the result of the history of the species, the current physical external factors, and interactions with other species. In evolutionary terms Sapiens don’t really have a goal they’re moving toward. Even survival is a matter of random chance. In more technical terms, evolution consists of variation, consequences, and heredity. Members of human species differ in just about anything that can be measured. These differences have consequences for the ability of species to survive and reproduce. Heredity is the passing on of traits from parents to offspring. Heredity operates via genetics. As traits are passed along the next generations become even more probable to be like their parents. With each generation of survival and reproduction the heredity of the species becomes more fixed and more permanent.

      • February 14, 2018 at 4:20 pm

        No evolutionist (biologist, anthropologist, etc.) would ever depict evolution as teleological.

        Yeah, I’m aware that most evolutionists are careful to describe their analysis as not teleological, but from my philosophical—Aristotelian—perspective, it sure does sound as though survival of the species is the implied “purpose” that is served by natural selection.

        I like your answer, though, that survival is merely incidental to the evolutionary events which are continually unfolding.

        I am satisfied that asking teleological questions while studying evolution is a useful heuristic to use in much the same way that we ask the question, “Why?”

        Why, of course, is a question that can only be answered in terms of what, when, how, where, and who. But with that single word, we are able to ask all of those other questions at once…

      • February 15, 2018 at 9:32 am

        James, one of the thrilling things about evolutionary theory is that it’s easy to learn and understand, and more importantly to apply. Darwin based his theory on observations over the period of less than one year on the Galápagos Islands. The observations lead him to construct a theory that literally revolutionized science and the world. Yet today, despite wide acceptance of theory among scientists a wide division developed about how and where the theory can be and ought to be applied. Like all theories evolution is a way of organizing facts that seems to make sense of the world. Likewise, scientific methods are merely ways of rejecting or supporting factual claims that emerge from theories. None of this is straight forward or linear, and all is chaotic and complex. As theories seem to gain support scientists establish, protect, and abide by the network of facts thus supported. These are ultimately moral choices, like the norms of a religion or a democratic government. Darwin’s theory has been moving through this process for over 200 years. With respect to evolution, most scientists and intellectuals believed till the 1960s that they accepted Darwin’s theory, but many would deny its relevance to human affairs or would blandly acknowledge its relevance without using it themselves in their professional or daily lives. In effect, there was a wall within academia that restricted the study of evolution to biology and a few human-related subjects such as human genetics, physical anthropology, and specialized branches of psychology. Finally, that wall is being breached in the last 50 years. Evolution is now being used in all the social sciences to understand and describe human actions. Except for economics. Not only is most economics work irrelevant due to poor theorizing but also because it fails to use evolutionary theory.

        On your specific statement, “Yeah, I’m aware that most evolutionists are careful to describe their analysis as not teleological, but from my philosophical—Aristotelian—perspective, it sure does sound as though survival of the species is the implied “purpose” that is served by natural selection.” Or, maybe the implied purpose is extinction. Or, maybe it’s both. Or, maybe neither. Which is of course the case.

  4. February 10, 2018 at 10:48 am

    Having flollowed Lars’ link to Dani Rodik, it appears experimentation is still being used BEFORE the event in the mistakenly “inductive” attempt to discover “the truth”. May I point out as a real experimental scientist that one builds a model on the basis of theory consistent with previious experience and experiments AFTER the event to test it and develop cures for its failings. Lars’ denigration of logic shows he hasn’t understood the phase of the process in which it is applicable.

  5. February 10, 2018 at 12:23 pm

    Yes, Frank – both to this and your second comment here yesterday: the logarithms applying only to scalars rather than dimensional quantities is nicely put.

    have a look at what I’ve been saying on the role of logic in model building (here your equations) as against testing the models after they have been built:


    • February 10, 2018 at 12:33 pm

      Apologies: wrong thread! Oh for an edit facility on this blog!

  6. Dave Raithel
    February 10, 2018 at 2:12 pm
    • Rob Reno
      February 10, 2018 at 11:02 pm

      Being envious? Being covetous? Being a chump? (Dave Raithel on Chump Consumption)

      It seems much of mainstream economic theory takes the lowest most base common denominator as its starting point. Hence, it might well argue I imagine that the fool buying a 1K tee is maximizing his utility. I am reminded of how modern marketing has its roots in WWII propaganda experts. Wants are unlimited while real needs are few. From where I sit it seems in the end it comes down to the values one’s culture fosters. I’m sure not feeling very comfortable in my own skin (culture) these days.

      • robert locke
        February 15, 2018 at 9:44 am

        One man’s chump is another man’s genius, because the values are ideographic not nomothetic.

      • Rob Reno
        February 15, 2018 at 3:35 pm

        Thanks Robert, still waiting for arrival of book from Germany. Hopefully soon ;-) Finishing up Fullbrook, then diving into your work. All the best.

  7. Craig
    February 15, 2018 at 6:43 pm

    Discussion is obviously a good thing, but is more productive AFTER one has recognized its relevant philosophical/psychological-experiential antecedent. Science is a trinity-fragmenting/fragmented-process of [ Hypothesis (true?, false?) ] and so does not lead mentally in the necessary direction. Wisdom is a trinity-unity-oneness/wholeness-process…that also includes the scientific dualistic determination of truthfulness/falsity within it. This is why we need a Wisdomics instead of a mere economics. The more inclusive, more integrated the mindset the better. Consult the world’s major wisdom traditions for their mental/experiential/proverbial insights sans any of their surface dogmas and determine their pinnacle concepts/experiences….and then align and apply policy and regulation to the relevant body of knowledge under discussion.

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