Economics is the Study of Human Reaction Functions

August 18th, 2013

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.

  1. The Arthurian
    August 21st, 2013 at 02:14 | #1

    Sociology is the study of human interaction.

    Economics is the study of monetary balances.

  2. August 21st, 2013 at 08:46 | #2

    Impossible to do a social science in isolation from other social sciences and life sciences, and without also taking into account quality as well as quantity.

    Economics is the way it is because economists don’t want economics to be considered a social science along with other social sciences. They want economics to be considered a hard science like physics, upon which the major metaphor of the market is based in neoclassical economics.

    When economics is considered in isolation the result is gobbledygook from which any policy that is desired can be derived from selection of assumptions and method. It’s pure BS logically. The ancients called it sophistry – “making the worse seem better,” now known as putting lipstick on a pig. And to the degree the false claim of being a hard science is made, conventional “positive” economics becomes religion.

  3. August 21st, 2013 at 08:57 | #3

    @Tom Hickey

    “Says John Aziz, “Economics, broadly defined, is the study of human action and interaction.” – See more at: http://www.asymptosis.com/economics-is-the-study-of-human-reaction-functions.html#comment-16734

    Conventional economists don’t “study human action and interaction.” They make stuff up, usually implicitly rather than explicitly as Mises did in Human Action.

    The neoclassical narrative is based on the sophomoric Benthamite utility calculus (utility maximization), methodological atomism (representative agency), assumption of “rationality” and “naturalness,” etc, as methodological conveniences that allow economists to avoid all the pesky issues involved with creating models that are representational. So the model represent ideal, non-existent “worlds” that are based on assumption of perfection and deviation from it.

    This is very convenient indeed for neoliberal political theory, in that markets are perfect and only become imperfect due to imperfections, either institutional — chiefly government, or else temporary like unforeseeable shocks. Left alone perfect markets will swiftly return to equilibrium after temporary shocks, so the real message is to remove long-term imperfections, i.e., government “interference.”

    Total BS.

  4. The Arthurian
    August 21st, 2013 at 16:06 | #4

    Tom Hickey :
    Economics is the way it is because economists don’t want economics to be considered a social science along with other social sciences. They want economics to be considered a hard science like physics, upon which the major metaphor of the market is based in neoclassical economics.

    Tom, when people start talking about what other people want or don’t want, or the motives of those other people — like Rush Limbaugh does — I lose interest.

  5. jason
    August 21st, 2013 at 19:01 | #5

    As someone working in a neuroeconomics lab, hear! hear!

  6. August 21st, 2013 at 19:01 | #6

    This is not only my observation but one that has been put forward by economic methodologists such Mirowski (Against Mechanism: Protecting Economics from Science and More Heat than Light: Economics as Social Physics, Physics as Nature’s Economics).

    BTW, I was told by a conventional economist just the other day that methodology is not up for discussion because “it has already been decided” by orthodoxy and everything else is by definition “heterodox” and not worth wasting time over — work within equilibrium models or get lost. Even though those models resemble the epicycles of Ptolemaic astronomy, which was the basis of the astrology of the time. This same economist was actually trying to claim that DSGE did actually get it right because someone wrote a paper how ad hoc adjustments allowed the model to predict the crisis. As I said, epicycles.

    Similarly, I find it curious how major economists get their models to say exactly what justifies their revealed preference in policy. Curve-fitting explained by hand waving? Krugman said recently that arguments coming from some top economists defending their policy view aren’t even wrong, they just don’t make sense.

    The issue is over “laws.” There are no scientific laws of human behavior. There is no agreed upon general theory of either psychology or social science, although there is a general theory of evolution in biology. But it was never adopted by mainstream economists. Because it involves complexity and emergence and is unpredictable other than in hindsight? Neoclassical economics developed in emulation of physic and the mainstream has never been able to break out of that methodological assumption in spite of devastating attacks from “heterodoxy” and abject failure of conventional models to foresee or repair the damage of the greatest crisis since the Great Depression. I take that as revealed preference.

  7. Caleb
    August 30th, 2013 at 13:14 | #7

    I always tell people economics is the science of decision making.

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