Economics is the Study of Human Reaction Functions
Says John Aziz, “Economics, broadly defined, is the study of human action and interaction.” Which reminds me to post this, which has been long brewing in my head.
More carefully and precisely defined, I posit the title of this post: Economics is (should be) the study of how individuals and groups react to changing circumstances (which circumstances include the reactions of others and other groups).*
The old saw is that economics is the study of scarcity. But that’s insufficient; it also studies abundance and surplus. How do people and groups react when there’s a bumper crop of corn? How do bankers react (individually and in aggregate) when there’s a superabundance of bank reserves?
Calling economics the science of scarcity inevitably turns attention to competition, even while some economists will acknowledge in passing that cooperation is a darned good adaptive response to scarcity as well — what got us to the top of the food chain, no?
If this focus on reaction functions is safe, it adds another voice to the question that many have asked: why has Kahneman and Tversky’s Nobel-prize-winning Prospect Theory been so studiously ignored in mainstream economists’ models? Why is the discipline devoted to armchair-theorized models, instead of studying what people do in the field? Why isn’t economics a true social science? (Yes, there’s a lot of that kind of work; but tenure at prestige institutions and publication in the big journals is all about mathematical models, not field research.)
At the very least, to quote the ever-sage Yoram Bauman (from memory): economists should be spending a lot less time on price theory and a lot more time on game theory.
* Group and individual reaction functions are obviously very different. If you know a bird’s flocking reaction functions (if you’re on the outside and the bird next to you moves away, follow it), you don’t necessarily know how the flock will behave and react.
Cross-posted at Angry Bear.