The much-misunderstood basic principles of economics

Listening to our media intellectuals can be hard on the head at the best of times, especially when it comes to intellectual things. No academic discipline is more often misunderstood and more often mischaracterized than economics.  My complaint here is not that commentators don’t understand money theory or derivatives, it’s that they don’t (or more likely won’t) get the basic principles correct.

The first principle of economics is not “homo economics,” i.e., it is not the assumption that human beings act rationally. The first principle of economics is scarcity, which means, as the everyday sense of the word suggests, that wants are unlimited and resources are limited. In consequence, all of us must choose between the things we want and prioritize when we want them.

Notice that scarcity is not an assumption open to debate; it’s a perennial, empirical fact about the human condition.  Argue all you want, then, about whether and how much this or that person should want or should have, the fact remains that we’ll always have to choose between toiling for our supper and eating it.

(As an aside, this last remark should suggest that the basic insight about scarcity is ultimately biblical: the writers of the Old Testament mythologized this insight in the exodus from the Garden of Eden. No more will Adam feast upon the abundant fruits of the Earth.  From now on, he’ll have to till the soil for his meals and build his own shelter. But this is a topic for another day…)

The corollary of the principle of scarcity—and the second principle of economics—is that people respond to incentives.  Responding to incentives is what economists mean when they talk about human beings “acting rationally.”  In other words, acting rationally (i.e., the much-ballyhooed homo economicus) does not mean that everyone behaves is a sober and reflective manner, calculating every move like little the Gary Kasparovs of their everyday lives.  Not at all; it simply means that we adjust to the world around us by making tradeoffs between the things we want to do and the things we can, based on the time and money we have. It’s a deceptively simple premise, which is likely why it’s misunderstood.

This notion of rational action, moreover, should put the lie to pseudo-argument against economics that some people act irrationally, and even the seemingly stronger argument that empirical evidence has been dug up to show that people don’t respond optimally to incentives.

It should be obvious that the first claim is a red herring.  That people don’t act rationally—where what’s rational is determined in accordance with some unspecified criterion—for the simple reason that economics makes no such assumption.  In fact, it would be amateurish to assume something as counter-intuitive as “everyone is a perfectly rational agent.”

The second is no less irrelevant, but it can seem like a more potent objection, because the notion of “optimal choices” does speak to the economic principle of responding to incentives. The problem with the objection, however, is that it supposes complete information or perfect analytical powers on behalf of actors.  It’s obvious that no one has complete information and (probably) none of us is perfect at picking the right course of action. So sure, people may be shown to consistently invest their money in the wrong place, for example.  But this only means we tend—when we do in fact tend—to make predicable miscalculations about our interests, not that we’re not forced to make such calculations in the first place.

In other words, the existence of sub-optimal choices doesn’t speak against the basic fact that people do respond to incentives.  If the price of cheese goes up, we may start eating bread instead or the reverse. Is this a wise tradeoff?  I don’t know.  The important thing is, however, that we respond in predictable ways, even when those responses could be construed as suboptimal (and thus irrational).

Now, none of this should be taken to mean that economics and economists are beyond reproach (so please spare this strawman rebuttal).  Even economists will admit that macroeconomics, for example, is a nebulous business.  But let’s be clear about the fundamentals so we know what we’re criticizing, instead of indulging in the same tired canards over and over again.

The Profound Pessimism of H. G. Wells’ The Island of Dr. Moreau

Anyone who’s watched John Frankenheimer’s 1996 film adaptation (starring Marlon Brando and Val Kilmer) might think that H. G. Wells’ The Island of Dr. Moreau belongs to that sub-genre of horror where the scientific experiment goes dreadfully wrong. In the film, Moreau tries to genetically engineer a non-violent race of human beings, only to create animal monsters.  So, the lesson is that Moreau’s obsession with conquering evil causes him to transgress the most basic moral boundaries.  He is thus a variation on Mary Shelley’s Dr. Frankenstein, where playing God makes one the hand-maiden of the Devil.

But if Wells’ Dr. Moreau (like Shelley’s Dr. Frankenstein) is a Promethean figure, he is an infinitely more pernicious one.  Unlike the ‘bringer of fire,’ Wells’ Moreau is not motivated by lofty ideals.  He is not moved by the very human desire to transcend death (Shelley) or to engineer evil out of the human genome (Frankenheimer); on the contrary, Wells’ Moreau is driven by a pathological curiosity abetted by a sociopathic ego.

In other words, Wells’ Moreau is not a visionary whose noble intentions become a real-life nightmare; he is a pitiless, amoral experimenter, willing to inflict any amount of cruelty to vindicate his hypothesis that animals can be transformed into a human beings.  Wells’ Moreau is more mad scientist than misguided genius.

Some have also compared Wells’ Island to Swift’s Gulliver’s Travels, seeing Prendick’s experience among the Beast Folk as analogous to Gulliver’s life among the Houyhnhnms.  The similarities, however, are largely superficial.  No doubt, the experience of both Gulliver and Prendick changed the way they looked at humanity thereafter.  But the naturally law-abiding and stoic horse-people have little in common with the morally incontinent Beast Folk, whose mindless incantation of the “Law” is more to remind them of the existence of the “House of Pain” and how to avoid it than to provide a model for life.

Moreover, the resultant changes in Gulliver and Prendick bear little resemblance to one another.  Gulliver is inspired to follow an ascetic life, trading the luxury and frivolity of everyday existence for quiet contemplation.  Prendick, on the other hand, is traumatized, condemned to seeing the animal in real human beings as he originally saw the real animal beneath Moreau’s human-like creations. In short, Gulliver is improved by his experience (at least from his own point of view and in some sense ours) while Prendick is merely haunted by his.

So, Wells’ Island of Dr. Moreau is neither a cautionary tale about the dangers of scientific hubris nor a satirical mirror in the excesses of contemporary life.  The book is really a profoundly pessimistic allegory about the human condition.  Moreau represents the naturally superior Nietzschean Overmen who shape the world and all within it into a form that serves their interests.  Like Moreau, they have created the Law that forces us, the human animals, into something more than the mere animals.  Thus, the Overmen’s civilization is maintained only through the threat of punishment (i.e., the “House of Pain”).  Like the Beast Folk’s, our humanity is ephemeral.  Our primal instincts are forever drawing us back to wallow in the mud.  In sum, our world, like the world of the Beast Folk, is just an invention of Moreau’s imagination—one contrived to further the intellectual pursuits that preserve him against the boredom caused by a purposeless existence.

One could expand upon this picture, of course, flesh out the details and draw some links with the text and the movement of the plot, but that is the general picture of the meaning of The Island of Dr. Moreau.

A note on academic strife

There’s some truth to the saying that faculty disputes are so big because the stakes are so small. Much the same might be said of disputes between students. Little can be lost (at least from a material standpoint) in either case by shouting down one’s academic peers.  But the reasons usually cited for this — i.e., the immunity conferred by tenure and the strong passions of the young — are not the main reasons for uncivilized behaviour in universities.

A combination of three things upholds civility in everyday life. In addition to good character and reciprocity is good old fashioned violence. When good character goes wanting, reciprocity takes up the slack as the most natural second fiddle, because we’d all prefer a civil atmosphere. But reciprocity has little purchase among professors or students, because neither is much beholden to more than a small clique of their peers, which, in most cases, belong to other departments or travel in different circles. That leaves violence, which works on construction sites and in factories, but academics have little stomach for throwing down the gauntlet.

One might suppose that this favorably contrasts academic social mores with the physical confrontations of the blue-collar rubes. But I think the opposite is true. Shouting, insults, finger-pointing and other intimidating body-language carry implied threats; thus, academics are more—not less—willing to be ruled by the violence. They are only disinclined to respond in kind in order to discourage such behavior in the first place.

Add to this the sometimes violent actions of student activists and it’s not a pretty picture. The social relations between peers comes down to one where those imbued with the moderation requisite for respecting others are expected to kowtow to those overcome by their passions. That’s not a happy state of affairs for a institution built on the free exchange of ideas.

Now, you may object that I’ve elided threatening behaviour and actual violence, as if the former were not a lesser evil than the latter.  But this objection ignores the very obvious fact that there is little difference between submitting to belligerent behaviour and submitting to actual violence—except, of course, that meek submission without objection is usually called cowardice.