Economics is not a natural science




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DJ Strouse August 12, 2009 Reply

This is a stellar article that stresses the importance of asking yourself the following question before reading the works of Malcolm Gladwell, Chris Anderson, and any of the increasing multitude of popular books on economics, psychology, and the internet – are there economic benefits to the point of view this book proposes and might those benefits bias the author’s analysis? In other words, might this book be a (willing or not) corporate whore?

The article also highlights two themes I’ve been thinking about lately .

The first is the existence of inessential pieces of our economy that have simply bootstrapped their way into the world. I was searching for a word for these features and posed the following question on Twitter a few weeks ago :”Is there a word for items that create their own market? (I don’t mean innovative items; I mean ones that exist as “fat of the system”)” I didn’t get any coherent responses but this essay at least offers some history of the phenomena. In case I’m not clear, let me offer an analogy gleamed from Cradle to Cradle (a phenomenal book if you have not read it). Many manufacturers end up with ingredient labels far longer than necessary. They add a preservative to increase shelf life… but then they need to add some flavor masker to hide the strange taste of the preservative… and then they need to add a color dye to hide the strange color of the flavor masker… but this reacts unfavorably with some original ingredient so they need to take out that ingredient and add a combination of three others that have the same effect… and so on. A long string of inessential ingredients are added due to shortsighted design. Most industrial chemists examining each individual feature of this manufacturing process would say, “Well, the dye is essential because it hides the color of the flavor masker and the flavor masker is essential because it hides the flavor of the preservative and…” In examining each isolated piece, these chemists miss the big picture that the entire complex of a dozen or so ingredients could have been replaced with a preservative that simply didn’t add an unfavorable flavor (or better yet, the original ingredients could have been tweaked for maximum shelf life without the need for additional preservatives). One of the authors of Cradle to Cradle is an industrial chemist who specializes exactly in this sort of global-picture streamlining. So here’s the comparison I wanted to make: these complexes of inessential ingredients in manufacturing are exactly analogous to the complexes of inessential controls and processes in our economy. Examples include the vast network of financial organizations that exist simply off the fat off the economy without contributing any value.

The second theme is only hinted at in the introduction of the article but is extremely important – the unavoidable cognitive biases rooted in human evolution that undermine the efficiency of our economy and even our own stated goals. I’ll end with a quick example so I don’t lose your attention with an exceedingly long email. Remember all of that money that “generous” state governments donated to New Orleans after Hurricane Katrina? Surely it helped save many people from starvation or homelessness, right? But think about where that many came from. Think about all the cancer research, school programs, and local homeless shelters that were denied finding in those states because millions of dollars were funneled to New Orleans. Might these projects not have saved more lives and contributed a greater net good to society? I’m not arguing that New Orleans should not have been helped, but I am stressing that our human bias for “sexy” humanitarian causes undermines our effectiveness. There’s plenty of more ground to be explored on the existence of cognitive biases in society and I encourage you to watch for and think about these.

Last note: Though its insights are interspersed with anecdotes of questionable relevance to the rest of the book, if you’re interested in the vast cognitive fallacies of economics, I’d recommend Nassim Taleb’s The Black Swan (or at least the Cliff notes).

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