More on why economics is bullshit

 

There are some other assumptions required by the theory, but I’ll end this exercise with one of the most important. In order for transactions to make the world a better place, all of the benefits and costs of the transaction have to be experienced by the parties. If a transaction somehow affects other people, that’s called an “externality,” and it’s the best known example of a so-called market failure. But it is difficult to imagine a transaction that does not have externalities. They aren’t an occasional problem that needs a special fix, they are pervasive and inevitable.

When you drive to the store for your tomatoes, you spew pollutants out of your tailpipe and you clog the road for other drivers. You also risk crashing and killing or injuring yourself or others. (Riding in a motor vehicle is mostly likely the most dangerous thing you will ever do.) The tomatoes were grown on farmland that was created by destroying a beautiful wilderness, sprayed with pesticides that indiscriminately kill beneficial insects as well as pests, fertilized with synthetic nitrogen that runs off into the river and ultimately causes a dead zone in the estuary. When you buy them you put them in a plastic bag that winds up in a landfill or maybe the ocean . . . I could go on.

As Polanyi wrote (page 3), referring to the origins of laissez faire in the 19th Century:

[T]he idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness.

That sounds bad. We have learned a few things since the 19th Century but nowadays many people seem to want to return to it. There are a few more problems with the theory of the Free Market™ that don't stem directly from the false assumptions, which we'll get to next.

Next Economics 101 lesson: Marginal utility and medicine

 

I should mention a component of the classical theory called “declining marginal utility.” This means that the first two or three tomatoes you buy are worth more to you than the next three, and by the time you have more than you can possibly eat before the next one goes bad, they’re basically worthless. (We’ll leave aside that the seller, probably a corporation, would like to sell as many tomatoes as possible and does not experience declining marginal utility of money.)

This idea seems basically to make sense for groceries or movie tickets,[1] but it doesn’t make much sense for medical services. Either you need something once, and you’re done; or you need it continuously, for the rest of your life. I’m not going to get a second right hemicolectomy no matter how cheap it is, and I would have been no more inclined to get the first one if it were free or even if they paid me to take it. On the other hand I’m not going to stop taking my blood pressure medications because I’ve gone long enough without a heart attack that I’m now satisfied.




[1] It’s actually not so simple. As I consume tomatoes or movies, I might acquire a taste for them and end up buying more rather than less. People might praise my tomato sauce so much that I end up bottling gallons of it and selling it, and buying all the tomatoes I can get my hands on. Then there are the cases of collectors and addicts. In other words these assumptions are generally intuitively appealing, but empirically half-truths at best.

Wednesday Bible Study: Paul appoints himself a demigod

I was just thinking that it's kind of strange that "Christians" made Paul's letters part of the canon -- having the same status of scriptural authority as the Gospels. As I've said before, it isn't really Christianity, it's Paulism, and right here, in Chapter Four, that's what Paul says, beginning with verse 14. He's the boss.

 

4 This, then, is how you ought to regard us: as servants of Christ and as those entrusted with the mysteries God has revealed. ² Now it is required that those who have been given a trust must prove faithful. ³ I care very little if I am judged by you or by any human court; indeed, I do not even judge myself. ⁴ My conscience is clear, but that does not make me innocent. It is the Lord who judges me. ⁵ Therefore judge nothing before the appointed time; wait until the Lord comes. He will bring to light what is hidden in darkness and will expose the motives of the heart. At that time each will receive their praise from God.

⁶ Now, brothers and sisters, I have applied these things to myself and Apollos for your benefit, so that you may learn from us the meaning of the saying, “Do not go beyond what is written.” Then you will not be puffed up in being a follower of one of us over against the other. ⁷ For who makes you different from anyone else? What do you have that you did not receive? And if you did receive it, why do you boast as though you did not?

⁸ Already you have all you want! Already you have become rich! You have begun to reign—and that without us! How I wish that you really had begun to reign so that we also might reign with you! ⁹ For it seems to me that God has put us apostles on display at the end of the procession, like those condemned to die in the arena. We have been made a spectacle to the whole universe, to angels as well as to human beings. ¹⁰ We are fools for Christ, but you are so wise in Christ! We are weak, but you are strong! You are honored, we are dishonored! ¹¹ To this very hour we go hungry and thirsty, we are in rags, we are brutally treated, we are homeless. ¹² We work hard with our own hands. When we are cursed, we bless; when we are persecuted, we endure it; ¹³ when we are slandered, we answer kindly. We have become the scum of the earth, the garbage of the world—right up to this moment.

Paul’s Appeal and Warning

¹⁴ I am writing this not to shame you but to warn you as my dear children. ¹⁵ Even if you had ten thousand guardians in Christ, you do not have many fathers, for in Christ Jesus I became your father through the gospel. ¹⁶ Therefore I urge you to imitate me. ¹⁷ For this reason I have sent to you Timothy, my son whom I love, who is faithful in the Lord. He will remind you of my way of life in Christ Jesus, which agrees with what I teach everywhere in every church.

¹⁸ Some of you have become arrogant, as if I were not coming to you. ¹⁹ But I will come to you very soon, if the Lord is willing, and then I will find out not only how these arrogant people are talking, but what power they have. ²⁰ For the kingdom of God is not a matter of talk but of power. ²¹ What do you prefer? Shall I come to you with a rod of discipline, or shall I come in love and with a gentle spirit?

 

Economics 101 continued: The root of all evil

Last time, we considered whether Bob really is always exercising free choice in the (fictitious) Free Market.™ Today, we consider Bob's situation when he does have choices and has to choose how to allocate whatever resources he has in order to obtain what he needs and doesn't have. This is where money comes in. Bob and Alice were just swapping corn for chickens, but reality is much more complicated. If Bob was exchanging, say, baseball cards for food they would be worth wildly different amounts to different food sellers, and trying to find the best deal would be nearly impossible. Bob would have to haggle with each of them individually before he could figure it out, and he might be dead by then.

I won’t go into the deep philosophical weeds about what money really is. Karl Polanyi calls it a “fictitious commodity.” It’s worth something because we pretend it is. For money to work properly in the economists’ magical world, its value for each person has to be equivalent to a quantity of an imaginary entity called “utility.” Supposedly we go through life trying to maximize our utility, a mysterious psychological property, something like the satisfaction of our desires measured in standard units, so that $1 can be equal to 1 utile. People are presumed to be “rational actors” – they calculate exactly how to allocate their monetary resources to acquire the maximum number of utiles. I won’t keep you in suspense: people do not actually do this.

Most fundamentally, we just don’t have the time or energy. There isn’t room in people’s lives or brains to thoroughly or even cursorily research every product on offer, deeply and honestly ponder our short- and long-term desires, calculate the probabilities of a purchase making us happy or disappointing us (people are very bad at probabilistic intuitions anyway), and accurately allocate our resources so as to maximize our utility or happiness or whatever you want to call it.

Instead, we rely on “heuristics,” cognitive shortcuts, and we often act impulsively. The term “bounded rationality” was used by Herbert Simon in the 1950s to capture the idea that we put limited cognitive resources into decision making, enough that our choices are usually good enough to feel satisfying, even if they could be even better if we worked harder at it.

Later work, most notably begun by the psychologists Amos Tversky and Daniel Kahneman, empirically explored the decision heuristics people actually use, and uncovered many so-called biases, that is ways in which people’s decision making differs from earlier assumptions of what is “rational.” They wrote many papers. One of their best known and seminal contributions is called Prospect Theory, the main idea of which is that people tend to be more risk averse than they are acquisitive, in other words losing fifty bucks hurts more than gaining fifty bucks feels good. (This obviously doesn’t work with gambling addicts, however.)

Subsequent work by them and others has revealed many ways in which people’s spending and investing behavior deviates from what was previously considered “rational.” I won’t belabor it here, but for now, I’ll just say that you wouldn’t see all that advertising if it didn’t work, and corporations aren’t spending the money to support your rational choice. Keep that in mind as you see what seems like 50% of all advertising being for drugs, snake oil, Medicare Advantage plans, and medical provider corporations.

 Next we'll have more to say about "utility."