Friday, January 25, 2008

Economics is not about money

"The most common misunderstanding about economics is that it is only about money and commerce."

The beginning seems like a good place to start, and the beginning of the misperception of economics is surely the popular notion that it's all about money. Where did that arise?

The quotation is from "What Economics Is Not" by Llewellyn Rockwell. Unfortunately, the essay also says:

"This is a confusion sown by economists themselves, who postulate something called “economic man” who possesses a psychological propensity to always behave in ways that maximize wealth."

Economics is social science, so we have to include an idea of how people behave. One way we do this is to suppose people have some likes and dislikes that their choices seek to satisfy. We suppose our "economic man" will behave in ways that maximize satisfaction.

That seems better than having "economic man" behave randomly: who could argue that we don't, in fact, try to make the best of what we have? Our problem is that it's very difficult to decide what people like or dislike. We know that many things affect the way we feel - a new car, sunshine, helping a stranger, being smiled at - and, of course, no two people are exactly alike.

To make matters worse, how would we even know if our "economic man" is striving to maximize satisfaction if we don't really know what makes him tick? What a huge philosophical question it is, and what an obstacle for economics to have to work with something so elusive as human satisfaction!

How can we recover? Economists often tried to make life much simpler by assuming that people only cared about wealth. Most people probably care about wealth to some degree, and wealth is, mercifully, more measurable than satisfaction, so this assumption shouldn't be way off the mark. Sadly, once we use the wealth proxy for satisfaction, our "economic man" looks like Rockwell's, and the misperception deepens.

Why was it deemed necessary to make the wealth-maximizer assumption? That is a question for another day. So, too, is how "economics" came to mean money, wealth or finance in its popular usage. Economics is to the stock market as physics is to your electricity bill - it's not unrelated, but it's a big stretch...

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