'Tell Me Something I Don’t Know About Economics'
Posted on October 30, 2014 — 3 Minutes Read
Economics is incomplete. One fundamental principle that many economic models build on, that we are all rational agents with clear preferences, is flawed. Imagine this, say you are buying a $20 book, would you walk 15 minutes to another store if the other store is selling at $10? I imagine most people would join me on this 15-minute walk. But now say you are buying a $20,000 car, would you walk 15 minutes to another dealer if it is selling at $19,990, that is $10 bucks less? I imagine most people would not care much about $10 of a $20,000 spending. This is one of our many irrational behaviours. Being a rational agent, we should give the same answer in both situations. You are spending the same amount of time to save the same amount of money. Your decision should be made with respect to your income, that is the value of your time. What you are buying or how much you are spending, is irrelevant. Economics in this example does not account for, among our many cognitive biases, our natural impulse of drawing comparisons, to a degree that irrelevant factors may influence our decisions.
In addition to the lack of account for the irrational beings that we are, its core resource allocation mechanism is often misused. At the core of economics is market. It is a fantastic tool to allocate goods and services. People want bread so people make bread. The more people buy bread, the less bread there is for people to buy, hence the more valuable each loaf of bread is, and so the more people make bread. This is beautifully efficient and these days we seem to use it for everything, even when the underlying good is not something as ordinary as bread. When used to allocate certain moral and civic goods, market allocation would demean the intrinsic value of the goods. How would you feel if I tell you that you can pay to kill to an endangered rhino, that you can pay someone to say your apology, that you can pay for an commercial advertisement on a police car, or that you can bet on whether a country will face terrorist attack, and as awkward as it sounds, that people are using the odds to predict where the next terrorist attack will be? Maybe we have gone too far with the market or as Michael Sandel said in his book, What Money Can’t Buy, on this misuse of market allocation that ‘we have drifted from having a market economy to being a market society’. If Adam Smith were alive today to witness how far the society has gone with what he envisioned when he wrote his magnum opus, The Wealth of Nations, he might have written it a bit differently.