tsfoulkes

Arthur Foulkes, Tribune-Star columnist.

We don’t get angry – or we probably shouldn’t get angry – when our pet cat kills a bird or rabbit. The cat may leave the dead animal on our back porch, but we know the pet is just behaving based on instinct. We don’t get angry because we know our cat did not make a malicious decision to kill a rabbit or bird.

With humans, behavior is different. It is affected by choice. Humans can make decisions and are not slaves to instinct.

This is in no way a knock on animals, who can be wonderful companions and pets. Rather, it is an acknowledgment of the complexity of human behavior and the futility of trying to study human behavior as if it were automatic. Humans can make choices and those choices are based on subjective human opinions and values that vary from person to person and even within the same person at different times.

Ask yourself why you decided to do something important such as quit a job, take a vacation or join a club. Was there a single reason you did this or a complexity of reasons?

If understanding the behavior of a single person is difficult, imagine the complexity of understanding broader social phenomena, such as “the economy.”

Some people believe that economic phenomena should be studied in the same way we study chemistry or other natural sciences. In other words, they believe we should form hypotheses, conduct experiments, observe data and continually reformulate our hypotheses based on our findings.

But economics and other social sciences are too complex for this approach. Experimentation is hopeless in economic affairs because we cannot “hold other things constant” as we can in a laboratory setting. For example, we cannot hold everything else constant and add $10 billion in new money to the economy and just wait to see what happens.

Economics is a science based on logical, deductive reasoning. In other words, economic theories are based on the same sort of reasoning used in geometry or logic.

If A is greater than B and B is greater than C, then A must be greater than C. We do not need to do an experiment to know that A is greater than C. We “know” it based on logical reasoning.

In the same way, there are economic propositions that we “know” without any need for experimentation. For example, we know that when two people make a voluntary exchange, both parties expect to become in some sense better off from the exchange or else no exchange would take place. We know this because we also know that all human action is aimed at improving the subject state of affairs of the person doing the acting.

Most university-level economics programs involve a lot of math and statistics. Calculus is used to calculate “optimal” economic outcomes. Unfortunately, in my opinion, this gives the economics profession an implied social engineering role. In other words, I believe it supports the idea that the economy can and should be planned.

When I was a student in the 1980s, I had the opportunity to spend about 12 hours one day in East Berlin, what was then the showcase of the Eastern Bloc. By communist bloc standards, East Berlin was a wealthy city and our enthusiastic and always-smiling official tour guide took us to many places designed to show us how well off the East Berliners were.

For example, for lunch we were taken to a fancy restaurant complete with a pianist and two bathroom towel attendants. Yet our lunch (no menus were necessary since there was no choice) was a plain hot-dog without a bun (called a sausage), a slice of cake and “cola” that tasted like mouthwash. Not that it was any great loss, but one member of our group did not get his hot-dog and cake. When he asked the waiter about it, the waiter looked puzzled and explained there were not more meals available.

The economy is really just all of us pursuing our goals, lofty and not-so-lofty. Economies produce more and provide more opportunities for us all when they are open to competition and where people are free to earn big profits or suffer big losses.

In my view, it would be good if we toned down the mathematical/planning approach to economics and focused more on the logical approach. This may not happen in my lifetime, but it is a goal I believe would at least take some of the momentum away from those who would attempt to make our economy more like those of the former Eastern Bloc.

Arthur Foulkes is a Terre Haute native and longtime resident. The Tribune-Star reporter writes a column on business and economics. He can be reached at (812) 231-4232 or arthur.foulkes@tribstar.com.

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