Rethinking Economics

This is originally posted on Tuesday, 12 January 2010 at 13:20

Mainstream economics do not make sense. Infact, theorising and imposing our theories on reality never made sense. Theories arise from reality, and are modified by it. In no circumstances should reality be subjugated to theory! That's why we need a paradigm shift - to rethink economics.

Never mind what the teachers, professors, textbooks, magazines and internet says- What do YOU really think?

You are the one who purchases, consumes or carry out economic activities everyday. You know about theories of the firm - but is economic activity limited to formal business enterprise alone? How about housework? The unspoken black market? Cooking at home and cooking at a restaurant - are they not both productive activities? Then why do some people consider homemade chicken as a consumption or poultry rather than a productive activity? There's so much space in current economic understanding to add on, to poke holes, or to tinker with!

You may not have a job, but you are surrounded by people who are carrying economic activities daily. They make decisions on purchase and preferences. So what and how do they actually come to their eventual choice? You are free to think! The theory may appear elegant, but at the outset they are conceived by human minds.

Are mathematical methods really the way to do economics? Maths has an intuitive language of its own- it helps me to understand certain basic concepts like the Law of Demand. But shouldn't theory be modelled from reality? So why are we not incorporate key human condtions (in terms of psychology, politics, social, cultural) into econometric models?

Here's my own take on Price:

Price, in current economics literature, have 4 properties:

1) Price reflects the value of a desired object- be it goods or services.

2) Price is set or influenced by firms on the "supply-side" based on their relative market power.

3) Households generate demand which also influence prices.

4) Price is also affected by the greater whole - aka the Economy that consists of everything: government, households, firms, non-profit sector, etc

But aren't we forgetting something?

[ Firms - Households - Government - Non-profit sector ]

What's the common characteristic here?

Simple answer: they are all made up of humans. And this - the virtue of firms, households, government, non-profit sector at the most basic level being human - makes the greatest difference. Humans are unique individuals. They think, feel, divide their loyalties and can be impulsive in their choices.

Humans are also unique in their social behavior. They manage impressions of others on them. They cooperate and reciprocate. They affiliate themselves. It can be in the form of key institutions such as the family or a religion. It may also be organisations like the Red Cross, Microsoft, House of Lords or SIM. It even extends to networks as diverse as the Tutsi tribes, the Facebook-Twitter-Friendsters and even Triad-Mafia-Yakuza connections!

But no matter what affiliations an individual belongs to, there are customs, codes and culture to follow. Trolling or flaming is frowned upon on forums. Most human cultures emphasise on integrity and honor. Youths adopt "hip" fashion to distinguish themselves among their cliques. Some of the rules are not even rigid - the can be fluid, changing with the times and circumstances, as well as being relative in value. Ever heard of "one man's junk is another man's treasure"?

I'm not writing to digress into celebrating mankind's vibrant arrays of social complexities. I'm here to make a point. Economy is embedded into society. Economics is a way of life - and it is subjected to society. Here's my take: PRICES ARE LARGELY SET BY CULTURE.

Yes, you heard it. Sure- firms have autonomy, households have needs, other parts of the economy are influencing and is influenced by the greater (macro) whole, blah blah blah. But I'm not buying the crap that "everything happens in a market with its rational actors to cause prices to move up or down". It's crap because these theories takes place in a cultural vacuum. And what's more - firms, households, government, non-profits are made up of PEOPLE.

Eventually, it is people who are setting the prices. So how can we assume that culture doesn't have a significant effect on all forms of economic activity (which influences prices)? The "mechanics" of price-setting we learn in mainstream economics sounds great, but I doubt that they have as much influence on price as the cultural context where the economic activity actually takes place. This will take much empirical research though, so let's just wait and see. Hopefully, my theory proves to be valid.

Follow Up Notes:

 Still, I don't mean that all we studied thus far is crap. What we study now is a neoclassical school of thought. Every school have their own lacunas that can be complemented and filled by other schools that better address the issue. For example, behavioral economics is more useful in explaining individual choice than the Budget Constraint or Indifference Curve we learnt.

So what we study now is valuable, in the sense that it provides a prior framework for us as students to dissect and cut through the underlying assumptions instead of taking everything we learnt for granted. On the realistic side however, I doubt we have alot of time to do this dissecting-cutting affair too often due to commitments and busy schedule. But when there's some time, it's good to do so.

13 January 2010 at 08:29