The study of economics, as I have seen thus far, seeks to steal aspects of mathematics and psychology to somewhat forecast society’s current and future operations. Professions ranging from pastry-chefs to presidents incorporate the widely assumed theories of this subject to support their decision-making.
However.
To a large extent this subject can be seen as flawed, for several destructive reasons. This piece will the first of (x) many ‘rants’ where I will seek to explain where this subject falls short of suiting our decision-making. Are these flaws verifiable and do they truly disrupt our use of economics? Perhaps and most probably not. Yet upon discovering such flaws, I changed the lens with which I viewed Economics.
This piece, as appropriate, will draw a focus on the most integral part of economic studies; us humans. We casually hear the phrases; ‘that’s natural, its okay’ and ‘better luck next time’ in the context of making mistakes, no matter what the mistake is. What does this actually mean? One may say it highlight an underlying assumption that humans may have some natural inability to perfectly understand what is before us, and thus makes our final outcome flawed. This is fully and one-hundred percent true. Economics, however, is largely predicated on a widely difunctional assumption that humans are rational and so are fully aware of the circumstances they present themselves in. Hence, the theories will only pan out in such a circumstance which is impossible to recreate in our world.
When discussing this point with my peers, one point is often raised and it follows something on the lines of, ‘Just because it doesn’t adapt to our circumstances perfectly, does not mean we should begin to disregard the theory and not apply it at all!’ To that, I would reply, ‘That’s fine, but even if we don’t disregard it, it still does not help us.’
In addition to the concept of rationality makes economics a more taxing job to understand, there exist a vast number of issues that plague our inherent application of economics to the real world. The first is the concept of the domain specificity. There exists an inability for us to ‘transfer knowledge and sophistication from one situation to another, from a theory to practice; a key attribute of humans.’ On such a basis, our reactions, mode of thinking, and intuitions all depend on the context that a matter is presented in. This ultimately means that we are, to an extent, wired to solely attribute merit to one theory depending on the context of where it seen. Linking back to economic theory, even if the theory was perfect, it would lead to a diluted and inappropriate outcome because we would be unaware to process the true working mechanisms of namely theories. In general, humans are effortlessly able to manage problems in a social situations, but consequently struggle when its presented in an abstract manner. If we refer to science, the brain lacks an all central coordinate system which make us fail to apply logical rules to all possible situations.
The second instance of human induced flaws relates to how we view evidence. Often, humans are faced with a tendency to interpret evidence in an abstract manner. We naturally look for instances that confirm or verify our line of thinking. Alas, these instances are easy to find and mistakenly support our flawed interpretations. This systematic error is defined as the confirmation bias and unknowingly plagues our thinking. Considering this, economic theory may never guide mistaken decision-making, but rather merely support it. Why? Since it is never truly applicable, it wouldn’t provide a true examination of how one action will pan out. Nassim Taleb, in his interpretation of the Black Swan, gives us news that there is a way around this naïve empiricism. He suggest that we can get closer to the truth by negative instances and not by this false verification.
The third instance, somewhat surprisingly, is rather more abstract but still worthy to mention. Let us assume economic theory is valid. But one more inherent flaw in us may still lead to a causal misinterpretation of this general theory. We like to summarise and simplify. It is what makes comprehend the more complex interactions explainable to anyone who seek economics. This, called the narrative fallacy, is associated with our vulnerability to over-interpretation and thus, severely distorts our mental representation of the world. If we were able to look at a statistic without weaving our personal explanation into it, the statistic would stand. However, upon wearing any bias explanation, we unnaturally bind fact together to make them easier to ‘understand’ – this goes wrong when it creases out understanding of how the world operates. Referring back to our brain, the left side has the function of interpreting the facts that are stored in right side, meaning we are inclined to explain what we see. What we may argue is that our propensity to make sense of what we see would invariably block our awareness of the key intricate detail making up the concept.
In school, for example, when learning about past key event, education strives to drill a cause for every event that occurs. As a result, we forget that there may be some metric of randomness embedded within events like recession in 2008 and the Cold War. Similarly, branching from the aforementioned point, our drive to make sense of complex interactions and theories places more order into them and thus extracts that key aspect of randomness. That ‘randomness’ may be the area where economic theory falls our and fails to enable us to accurately forecast how society operates. This concept of such a narrative also means that our interpretation of what lies in front of us in always in state of change. Called reverberation, we ‘continuously re-narrate past instances in light of what appears to make sense after events occur. On such a basis, we are never truly able to learn from past events as much as provide an explanations for why it happened.
It has been discussed at large some of the human induced flaws of economics. On a concluding point, although economic theory, as I see it, is inherently flawed, there still exists numerous factors beyond economics that distort how we make our decisions in light of the theory. Our inherent need to incorporate human embedded bias and explanation simple distances our forecasting from the real truth.
Economics Relate 