Numbers & Nurture

I was listening to EconTalk episode “Erik Hoel on Consciousness, Free Will, and the Limits of Science”. Grappling with the “seemingly subjective inner world of human experience with the seemingly objective outer world of observation, measurement, and science”. It was a wonderful talk and I highly recommend. I wanted to highlight a particularly revealing part of the podcast where they discuss economists. Russ Roberts about 22 minutes in says:

So, I’m going to try something insane about economics. You can take it or leave it. We’ll see how it goes. I just thought of it, so we’ll see what comes out.

I have–as a young economist, and I think most economists still today are very focused on the material. They focus on what is the extrinsic perspective? Standard of living, command over goods and services, wealth: stuff. And, GDP is just a dollar denominated or currency denominated measure of stuff–goods and services–as a measure of the productivity of the economy. And, a lot of people don’t like economics and they make the point, ‘Yeah, but there’s things besides stuff. We don’t just care about stuff.’ And economists, ‘Oh, of course, you’re right.’ And, they always, ‘Yeah, yeah, yeah.’

But, what the problem is–for me, in my view of this–is that economists certainly will concede that there are things other than stuff, but they have trouble incorporating the non-stuff stuff into their math. So, they kind of just say, ‘Well, that’s something else.’

Like, so, for example, the despair of losing your job. And, most economists are not going to focus on that. They’re going to focus on the fact that your material wellbeing will take a dip downward. If you have savings, you can insulate yourself, insure yourself against some of that. You might have friends you can rely on and so on. But, the despair part or the fact that you don’t feel like you have a meaningful life because you’re unemployed–that you’ve let down your family, say,–that’s not in there. That’s for other fields. And, I think that’s a fundamental misreading of the human condition. It’s the biggest shortcoming of economics.

-Russ Roberts

It’s not that Economists are seeking to ignore human conditions. They simply lack (and may never possess) the means to quantify what Roberts eloquently refers to as ‘non-stuff stuff’.

Here are a few examples of economic laws or theories that make bold and powerful assumptions about human impact on the economic system.

1. The Law of Supply and Demand: At its core, this law posits that if demand increases, the price will rise, and if supply increase, the price will fall. This law doesn’t fully capture the effects of behavioral biases, irrationality, or societal values that can influence decisions.
2. Rational Choice Theory: This theory assumes that individuals always make decisions that provide them with the greatest benefit or satisfaction and are suitable for their preferences and constraints. Humans are not always rational and are influenced by emotions, biases, and other psychological factors, and don’t always act in their self-interest.
3. The Efficient Market Hypothesis (EMH): EMH claims that financial markets are efficient, meaning that current prices fully reflect all available information. However, the existence of market bubbles, crashes, and herd behavior suggests that investor psychology and irrationality play a significant role in markets, challenging the always-efficient market notion.
4. The Fisher Effect: Relates nominal interest rates to real interest rates and expected inflation. Implies that the expected nominal returns on assets should provide a complete hedge against inflation. This requires perfect foresight about future inflation and can overlook other factors influencing interest rates, like central bank policies or global conditions.

The ‘non-stuff stuff’ represents the human variance that no set of numbers can ever fully predict. While this limitation is acceptable, it is crucial to recognize the boundaries of our understanding.

Experiencing variability in life is good. The need to predict the future with absolute precision can cause an anxiety that is counterproductive. Know what you can and cannot control, but always be on the lookout for that Non-stuff stuff.