Class Warfare Blog

October 20, 2011

Economic Man—Part 2, Rationality Goes Out the Window

Filed under: Economics,Politics — Steve Ruis @ 11:55 am
Tags: , , ,

Modern economics is based on rational decision making. The focal point for economists in training is the so-called “economic man” (Homo economicus) who, by making self-interested decisions, based on having enough information available to make a good decision, made economic markets work. This 20th Century evolution of classical economics sounds perfectly reasonable. But “reasonable” does not mean “true” or even “helpful.”

Let’s assume it is true: we make economic decisions rationally by, in essence, weighing the data.

I remember a time when my father decided it was time for a new pickup truck. He did his research, figured out the make and model he wanted and what price he wanted to pay. He then spent quite a while saving up the purchase price. He then went into an auto showroom, told a salesman what he wanted and for what price and if they said “yes,” he paid in cash and drove his new truck home. This seems to fit the rational decision making model based on the economic man to a tee.

But what do I see now? I see 20 brands of mayonnaise on grocery shelves. I see multiple web sites giving conflicting advice on any purchase one may want to make. I see purchase processes so complicated that an accountant can’t figure them out ahead of purchase. “Oh, if you want that phone, it is only $69.95 (if you sign a two year contract for phone services for $XX per month, taxes, fees and whatevers not specified until you get your first bill). Now, would you like our warrantee that protects you if your phone is lost or stolen, and for only $YY per month, we will store all your contacts and emails on our “cloud,” yada, yada, yada.” Is it no wonder that our decision making is no longer rational? (Phone, want phone; want iPhone!)

I used to go to Consumer Reports magazine in the library to do research but now I use the internet, the search engines of which sell high rankings to companies. We have access to data, lots of data, more than anyone can sift through. We are suffering from data overload. We are distracted with irrelevancies and then swamped in an ocean of “information.”

This is nowhere more prominent than in politics. The economic man theory is a theory about how people make economic decisions, but a decision is a decision. Making rational decisions, ones in one’s own personal best interests, should be the basis of a good political system, as much as the rational economic decisions make for a good economic system. But if the “rational” part of each of us can’t identify important information or worse, can’t find important information, then rationality is out the window.

Our politics is dominated by ideas that have no merit. One such is that rich people are “job creators.” That may have been true in the past but was never proven, it is merely a supposition that rich people invest their money in banks and stock markets and bankers and stock markets provide funds to businesses to hire people, should they want to. But is this what is actually happening now? Apparently not. Banks are not lending anywhere near capacity. Businesses collectively are sitting on nearly $2 trillion of cash and, hence, don’t need loans or stock sales and the stock markets, well. . . . argh! The stock markets have been taken over by “financial engineers.” Harvard University actually created a program to produce such people, whose job it is to figure out how to extract money from the stock markets to make the engineers (or their masters) rich but to not produce anything of value in trade. This is where the “exotic investment instruments” (derivatives, etc.) that you may have heard of came from. These are “milk the goat” schemes: the goat has the milk, I take the milk. I am the richer for it. But what does the goat get out of the deal?

So, are the companies whose stocks are being traded on the stock markets, paying dividends to stockholders, actually creating jobs? Well, the recent record shows way more jobs shipped overseas than have been created here, so the “job creators” would be better labeled as “job exporters.”

So, why is that phrase pounded on time and again by Republicans? Well, even if it is a lie, it is close to a plausible truth and it is easier to repulse “tax increases for job creators” than, say “tax increases for the filthy rich” or “tax increases for job exporters.”

You and I aren’t even getting bread and circuses here. We are getting disinformation, not misinformation, but disinformation and large quantities of it. When the current Republican candidate for president, Herman Cain, announced his 9-9-9 plan it was lauded as a brave new plan. (Nein, nein, nein! is no, no, no in German, which is appropriate for the Party of No.) Even though it clearly states that we should admit that “ were mistakes and we should just give them up” a position that overwhelmingly is not in favor in the American electorate. Is the 9-9-9 plan serious? I think not, as no argument is being made for its qualities, just grandiose claims as to what it would accomplish. A plan needs some “how” to explain its “why.”

While people spend time arguing the “merits” of this plan, real problems are not being addressed. (The House just banned using federal funds for abortions for the seventh time. I guess they got bored doing nothing of substance.)

I don’t know if it is still the case but at one time, the city of Brisbane, Australia hired a town scientist whose job it was to explain scientific and technical issues to the town council and the public at large. Wouldn’t it be nice if cockamamie economic plans would also be required to be vetted by an independent panel which would simply and succinctly state the facts, . . . the impact on a poor person would be a large tax increase, the impact on a wealthy person would be a large tax cut, etc. Then we could be focused on some real information instead of debates like we have now, such as:

“It will solve the problem!”
“No, it won’t!”
“Yes, it will!”
“No, it won’t!”
“Yes, it will!”
“No, it won’t!”
“Yes, it will!”
“No, it won’t!”
“Yes, it will!”
“No, it won’t!” . . . . ?

Aren’t you tired of this? Don’t you want more from your politicians?

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