Reading: The Problem With Modern Economics (Elise Daniel)

I studied economics at James Madison University, and I remember being so confused in my upper level economics courses. All those letters and curves on the board were overwhelming! Price-takers and rent-seekers, monopolies and oligopolies, linear regressions and nonlinear regressions—my brain was constantly in a state of “information overload.”

If I didn’t know what all the arrows and symbols in my notes meant, how can I expect a non-economist to understand them? Or more complex economic realities like the 2008 financial crisis? Or the effects of the stimulus packages?

Economics has become a field for academia snobs and policy wonks, not everyday people. Why is it so confusing? Might it be because we are only looking at a very small part of the picture?

One of my favorite songs by singer-songwriter Andrew Bird, “Give it Away,” indirectly yet accurately reflects what is wrong with the field of economics today:

What would you have us pay?/I didn’t know that your love was a commodity /…What about inflation, oh/Your charts and graphs don’t mean a thing to me

Even though Bird’s song is aimed at an individual, I think the lyrics shed light on economic issues at large.

In the first verse, Bird references the commodification of an uncommodifiable substance: love. It doesn’t take an economist to recognize how emotions like pleasure, anxiety, charity, guilt, and love affect economic decision-making.

These emotions cannot be assigned a number, yet this is what modern economics seeks to do: quantify the unquantifiable. Emotions are quantified to fit economic models, or economists eliminate the human element completely. The second verse reveals the result of this sort of economic dehumanization: charts and graphs that don’t mean a thing to anyone.

The number one problem with modern economics is that it fails to see the whole human picture. It has created an abstract, perfectly rational species of man: homo economicus.

Investopedia defines homo economicus as

The rational human being assumed by some economists…Homo economicus, or economic human, is the figurative human being characterized by the infinite ability to make rational decisions. Certain economic models have traditionally relied on the assumption that humans are rational and will attempt to maximize their utility for both monetary and non-monetary gains.

Modern economics has reduced humans to one-dimensional, perfectly rational economic agents. However, human beings are not always rational decision makers.

There are numerous examples in the Bible of human irrationality caused by our inherent sinful nature. Romans 1:18 says men “suppress the truth in unrighteousness.” Even Paul struggles with the idea that he cannot always choose to do what he wants to do.

In Romans 7:19-20 he writes,

For the good that I want, I do not do, but I practice the very evil that I do not want. But if I am doing the very thing I do not want, I am no longer the one doing it, but sin which dwells in me.

The economic models we use today deny the irrationality that is intrinsically connected to our fallen nature. Modern economics operates in a perfect framework with absolute assumptions and conflicts with our unpredictable and sometimes irrational behavior.

One example of economic irrationality is called “the choice paradox.” According to Professor Mark Pennington, choice paradox means that when consumers are faced with too many choices, they may not make a decision at all!

I am a perpetual victim of the choice paradox when I shop at Forever 21. I have a meltdown after scanning unorganized racks for ten minutes. I walk out of the store empty handed—not because I couldn’t find what I needed, but because the choices were overwhelming. This is irrational because I do not successfully satisfy my consumer demand even though I have the opportunity.

On the other hand, when I shop at smaller stores with fewer choices, I am often quick to make a decision that satisfies my demand. Modern economics does not account for economic realities like the choice paradox because it assumes perfectly rational decision-making.

Furthermore, many human desires simply cannot be fulfilled purely by economic objects. It is impossible to commodify or quantify these desires into a model as modern economics seeks to do. Richard Neuhaus famously said in the Centesimus Annus,

To attribute everything to the economic factor is to perpetuate the terrible lie of the Marxists. In addition to the economic is the political and, most important, the cultural. At the heart of the cultural is the moral and spiritual.

The problem is clear. Modern economics attempts to assign a number to human characteristics and assumes away the true nature of man by holding homo economicus is fully rational. This leaves us with a heavy emphasis on math and an inaccurate portrayal of the human person. Tomorrow I’ll explore how economics got so off course.

- See more at: http://blog.tifwe.org/the-problem-with-modern-economics/#sthash.918CYLTu.dpuf