The Wiki Man

Why human nature means most economic models are doomed from the start

9 June 2018

9:00 AM

9 June 2018

9:00 AM

History records many well conceived and apparently logical grand plans for the betterment of mankind. Sadly such ideas almost always fail. Why is this? One possibility is that they fail precisely because they are logical.

The dictates of logic require the existence of universally applicable laws. But humans, unlike atoms, are not consistent enough in their affinities for such laws to hold very broadly.

For example we are not remotely logical in whom we choose to help. Will wealthy Germans help poorer Germans? Yup. Greeks, however? No chance. Utilitarianism makes perfect sense — right up to the point you try to apply it.

As Orwell said, ‘To an ordinary human being, love means nothing if it does not mean loving some people more than others.’

In his new book Skin in the Game, Nassim Taleb includes what is perhaps the most interesting quotation on politics I have ever read. It is by Vincent Graham, explaining how even his political preferences change with scale and context. ‘At the federal level I am a Libertarian. At the state level, I am a Republican. At the town level, I am a Democrat. In my family I am a Socialist. And with my dog I am a Marxist — from each according to his abilities, to each according to his needs.’

The drive to be rational has led people to seek to find political and economic laws which are akin to the laws of physics — universal, unchanging over time and applicable at any scale. Experts love such universal principles — as they allow them confidently to pronounce on things of which they have no direct experience.

In reality, it is often context or scale which is the most important thing in determining how people think, feel and act. This simple fact dooms many universal models from the start.

Economic theory is perhaps the most overambitious attempt to create universal rules of human behaviour — ‘markets in everything’, as the phrase goes. Yet in economic theory, it is all too common, in certain settings, for people’s behaviour to run directly counter to the logical tenets of standard economics. Take London housing. Logic would suggest that as house prices in London continue to rise, many Londoners would take the gains and buy houses further away, relaxing the pressure on prices.

In reality, however, it seems the opposite also happens. When sitting on a rising asset, people who would secretly prefer to move 50 or 200 miles away are disproportionately reluctant to leave, for fear of missing out on future gains or for fear that, once they left London, they would be unable to move back in again. In the market for, say, crude oil, behaviour might follow economic predictions — rising prices may drive asset owners to sell more. But markets for housing and oil are in reality so different that they march to a completely different drum.

Does a tax rise make you work less, as returns to labour are lower? Or does it spur you to work harder, to maintain your wealth? It kind of depends. And are student loans a) a wonderful mechanism to help everyone go to university or b) a freedom-reducing disaster which forces people to go to university just to secure a reasonable job? Again, it depends. Think about it this way: if everyone could borrow £3,000 to spend on a suit for their first job interview, anyone turning up in less than Savile Row bespoke would look like they weren’t really serious. Might it be better to lend young people money for anything they like, rather than forcing everyone to compete for academic credentials?

In physics, the opposite of the truth is generally wrong. In human behaviour, the opposite of the truth is sometimes true as well.

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