Economics Overapplied

Dan K News & Views

If you pay attention, you may notice a tendency among people to take a concept they have learned, especially when it is new to them, and apply it a little over-zealously. An obvious example is how every hot new thing right now is on the blockchain. This also applies to new lenses through which we can view the world. Perhaps you just read Machiavelli and took it a bit too much to heart, and now you are looking at everybody askance because they are trying to manipulate you. Or maybe the Guru-of-the-week gave you some new project management technique, and you are so excited by it you start using it to plan your vacation.

I have noticed one such tendency, a subtle one, in myself and other libertarians. We are so enamored with the insights of economics that we sometimes apply it to our own internal working models, where it does not belong.

For example, consider the difference between a “want” and a “need”.

This is one that I have caught myself considering in overly economic terms. Behavioral economics likely has something to say about “wants” vs “needs”, but libertarians do not tend to like behavioral economics. We like the kind of economics that says that there is no fundamental difference between “wants” and “needs”, there are only things of higher or lower demand. There is a price for everything, at the end of the day. Even our own lives, in a sense, have a price inasmuch as we are ever willing to risk it even a tiny bit for something that we could survive without, such as driving to the movie theater.

I have at times found myself applying this to my own decision making. “Do I really ‘need’ anything, after all? No, I just want things more or less!” It leads me to make some ridiculous prioritization choices. “I mean, I don’t really need to replace my lightbulbs, do I? I can use my phone’s flashlight for now.” The problem is, we are not built as Homo Economicus. We cannot deal with the entire landscape of possible decisions and consequences. We have to start putting things into a simple system of bins labeled “need” and “want” for our own sanity.

Sure, we can look back at our past actions and attribute concepts like action, transaction, incentive, etc. But those are all reflective. They are all categorization of observations of the behavior. They have no place in analyzing the causes of the behavior or more importantly our own experience of the process. There is no reason to think that thinking in economic terms is useful for our decision making. We are better off thinking in terms of “my desires” or “my insecurities” rather than “my demand”. Does this contradict the economic model? Not really, so long as you assume that our demand curves take whatever peculiar shape they do as a result of this mental model.

Transactions are another interesting one.

Some have taken the economic concept of transactions and pondered, even if for the sake of thought experiment, why every interaction is not entirely transactional. For instance, why do we hold doors open for people without expecting a tiny payment in return? This again seems to me to be an application of economic concepts where they do not belong.

In reality, of course transactions are real. So too is Conservation of Momentum. Like transactions, Conservation of Momentum is a concept that is useful when analyzing an aggregate of events. It is also completely useless to think about when playing basketball. Patterns of behavior and ultimately prices emerge when one looks at the result of transactions.

But the process of each transaction is a psychological interplay. One may not even be thinking of it as a transaction at all. How many times have you been daydreaming about something else entirely while pulling money out of your wallet at the counter, perhaps half-aware of how much you’re even spending? (Or maybe I’m just weird.) At any rate, our strange behaviors involving resources often fall into economically efficient interactions that can be usefully modeled as transactions. But sometimes those behaviors result in other interactions which cannot be modeled as transactions at all, such as happens within a family or small community.

Even the concept of a price can be misleading.

They can lead to misguided questions such as “how much is this thing worth?” Perhaps libertarians are less likely than most to ask this question, as it implies the concept of some intrinsic aspect of an object called a “price” or “value”. We tend to like the Subjective Theory of Value. But we may still look at something and wonder, “How much do I value this thing? How much would somebody have to offer me to convince me to part with it”? But even this is only a construct useful for economists who observe transactions from the outside. In reality, yes, the answer depends on whether enough money was offered, but probably also on the time of day, or whether you had your coffee that morning, or the color of the person’s shirt, or if the amount offered was an even multiple of one hundred.

These interactions are absolutely chaotic. Economics is our hope of smoothing it all over in aggregate and having some sort of orderly model of what is going on around us. But it has a way of infecting our thinking about our own actions. One wonders if it has made us feel overly guilty when it comes to things like returning favors.