The Economic Mindset

This post is a synthesis of some of my thoughts on material from the book “Economics for Dummies”, by Sean Flynn.

Economics identifies itself as the science of scarity: an inquiry into why and how people make decisions about the allocation of resources for maximizing overall utility. In essence, it centralizes the unfortunate fact that all matter in this world are limited and attempts to find the most efficient and productive means for dealing with what limited resources we have. This single ideological strand that ties together every principle and theoretical thinking underlying the dismal science of economics.

Economics permeates all realms of life. In particular, the field is split into two basic components of macroeconomics and microeconomics. Macroeconomics deals with the consequences of large scale movements  of capital, labor, and finances, and it understands the transactions amongst different nations from a birds-eye, top-down manner. The emphasis is usually placed on the global scale, and the mechanisms involved includes monetary, fiscal, and regulatory policies. Microeconomics, on the other hand, deals with the behavior and implications of certain individuals or particular firms as situated within different nations. The emphasis here is in the relational statuses of firms and individuals with one another, along with how and why certain decisions are made. Both macro and microeconomics operate within the realm of markets and competition, and mathematical models are developed for the sake of maximizing production or for predicting behavior.

In particular, there is a focus area in microeconomics that I am most interested in: behavioral economics. The study of behavioral economics deals with the social, psychological, cognitive, and rational factors involved with decision making. My personal preference is a more philosophical and theoretical take on the economics of how behavior results from implicit economic calculations. I am much less interested in the attempts to model such theories, for not only are they inadequate in so many regards, they are also just plain boring to learn about. In economic terms, I would say the opportunity costs to developing a model-based understanding of economics are too great, and the marginal utility I gain from such an attempt too little to justify the endeavor. I would rather maximize the utility of my time and education elsewhere.

To dive briefly into behavioral economics, there are three essential components: first there is identifying an option that produces the most utility (AKA whatever makes you happiest); second, there is clarifying the stakes and limitations to the decisions that can be made; third, there is making the decision after taking into consideration the pro and con factors involved.

The first step of identifying an option that produces the most utility seems to involve less of economics than it does philosophy. For instance, the “utility” in this case refers to what makes you happiest. This happiness can translate into what is most pleasurable on a material level; it can represent what is most engaging on a psychological level; or it can refer to what is most purposeful on a personal or spiritual level. Economics disregards all of those nuance differences and simply puts them all under the sterile caption of “utility”. The reason Economics categorizes such qualitatively different motivations in such a poorly descriptive term is because Economics doesn’t care for intent–it cares only for outcome. This view stems from the core notion that humans all have self-interests and attempt to satisfy these interests in different ways. It sounds almost immoral to view the complexities of life in such a crude measure Either way, because economics is born out of the paradigm of scarcity, it is of no surprise that it decides to settle with its pragmatically amoral stance.

The second step of the quest for maximal utility is identifying the limits and restrictions to making decisions. Because this step is all about dealing with and navigating around limitations, this component seems to be where the bulk of economic models tend to be concentrated. For one thing, there is the idea of the opportunity cost, which is the value of the next greatest alternative that one must give up in order to make a certain decision. If I am typing this blog, my opportunity cost is the time I could have spent working on my economics problem set I have due tomorrow. The biggest concern I have about the idea of opportunity costs is that it seems to entertain the view that humans are omnipotent and can always know that what they choose is the best of all options available. Setting this contentious problem aside, there is also the law of diminishing returns, which states that the return reaped from a particular product or action tends to decline with each successive use or action. For instance, when I first started typing this blog, I was very absorbed about what I was typing and meticulous about my style. With each word I type, however, I find the law of diminishing demand kicking in, and feel the “pleasure” I gain from blogging slowly declining. I have to put in more and more, and I am getting less and less out of it. It’s quite an interesting phenomenon.

To jump the gun, the last component to the quest for maximal utility is making a decision. Although this step seems to involve the most economics of balancing costs and benefits, psychology plays a big role as well. In this three-step model for behavioral economics, the basic assumption is that all humans are rational in deciding the options that best maximize their limited resources. However, as research has shown, consumer behavior is very much tied to a lot of irrational factors as well. After all, why do people buy lottery tickets when economically speaking, the chances of winning are like being struck by lightning 7 times? There is a multitude of factors involved in human decision making, some conscious and others not. The role of the mind in making a decision is where the rubber hits the road, and although economic models are helpful for predicting behavior, they would benefit very much from the support of research done in the field of psychology.

Ultimately, I would like to conclude with a final observation about the significance of technology within all this talk about economics. Because resources in life are limited, technology has been and always will be the single most crucial element to maximizing productivity. When I say technology in this case, I am not simply referring to the technologies that have brought about the industrial revolution and ushered in a new era of prosperity. I am not only talking about the computers, the airplanes, the cars, and Blackberries that help us live our lives with greater productivity. I am also talking about the technology of the mind. The mentalities we adopt–our psyche–is our most precious technology. After all, our mindsets determines the habits we develop, the skills we hone, the environments we immerse ourselves in, the people we choose to meet, etc. Ultimately, if we can understand and utilize the technology that is our mind, than we can maximize the utility to everything we do, regardless of the economic factors that try to subject us to certain decisions. The X-factor is in the mind.