Behavioral Economics, back to the future?

Behavioral Economics is not a new science, it is rather a new method applied to an old concern.

Jevons and Edgeworth were practitioners of Behavioral Economics, as long as we understand this branch of Economics in a broader sense. Marshall, likewise, opens his "Principles" stating that Economics "is on the one side a study of wealth; and on the other, and more important side, a part of the study of man". 

But then there was the Paretian turn. Fiat homo economicus! 

Most people would blame Walras, but that is not quite true. 

What has come to be known as Walrasian Economics does not resemble Walras' original thought. One should blame Allen, Hicks and Samuelson for the façon de parler imposed upon the french, poor little León!

Little by little Economics became an "as if" science, the process of decision is something that should concern Psychologists, not real practitioners of science. For there are those worried about stupid little things, e.g., the human mind, and there are real scientists, capable of taking the derivative of a trigonometric function in a blink of an eye.

Let me get back to the point, me and my friend Alysson Lorenzon Portella are writing a paper about this subject (it will be less ironic and more interesting than this post, I hope).
Our argument is that Walrasian economics can be interpreted as an interregnum in the History of Economic Thought. 

We address the plurality that once populated economics, particularly Armstrong, Bernardelli and Georgescu-Rogen and how they relate to Behavioral Economics, the awkward interpretation of Walras' tâtonnement and how it became the modus operandi of our science, and, finally, the possibility of modern economics divorcing from its Lausanne School monotheism. 

I'm happy to be married with my lovely wife, but please let me have intercourse with different areas of science. Marrying once is great, but twice is just stupid! 

Are we headed to a new cycle of plurality in Economics or is nowadays call for change just a consequence of the crisis?

Economists are full of crap with their crystal balls and their pseudo-science-santeria,
so I don't dare answer to such question.

All I have to say in that regards is:

Keep your eyes wide open, don't marry the status quo and do what you believe, 

don't believe in what you do. 

(43 -49) I bring my tale to a close

This week I’ll post miscellaneous comments about Robinson Crusoe’s final chapters:

1)               Economies of scale:

“I had now been on the island twenty-seven years. My man Friday had been with me about two years, and these had been the happiest of my life. I had everything to make me comfortable and happy”.

If Robinson and Friday had worked together, we should except economies of scale, for their average cost to product should diminish as two workers can handle harvesting much more efficiently and so forth. However, since Friday became Robinson’s servant rather than his friend, and wouldn’t let his master do any of the hard work, at the end we cannot argue that there were scale efficiency gains.

2)               Keynes and Functions of Money:

“And so, on the 19^th of December, 1687, we set sail for England. I had been on the island twenty-eight years, two months, and nineteen days. I took on board with me the money that had been by me so long and had been so useless”

When Robinson kept this money I found it extremely curious. That made me think about the intrinsic value of money that Keynes has pointed, and how people valuate money independently of the goods it may buy. However, once Robinson left the island all that gold (money) that he kept made sense, for Keynes has pointed other functions of money, including its role as store of value over time.

3)               Brazil, Sugarcane and Tobacco

“By chance I learned that my plantation in Brazil was doing well. The man whom I had left in charge of it had made much money from the tobacco he had raised. He was an honest man, and when he heard that I was still alive he wrote me a long, kind letter (…) he also sent me a large amount of money”

Prior to being cast away on the Island, Robinson lived in Brazil for a short while. Actually, the reason he was cast away was exactly an attempt to buy slaves for his production in Brazil. He bought some land and noticed that it was very fertile and it would be easy to grow sugarcane and tobacco. Twenty-eight years later his predictions were met.

If only economists were as good in predictions as our friend Robinson…

4)               Idleness doesn’t suit Protestantism nor Robinson:

“I was now a rich man. I might have settled down to a life of ease and idleness; but such was not my wish. Soon I was wandering from one place to another, seeing much more of the world. I had many surprising adventures, I assure you; but I need not tell you about them. You would think any account of them very dry reading compared with the story I have already related. And so, looking back with regretful memories to the years which I spent on my dear desert island, I bid you a kind good-bye.”

(38 - 42) Friday and Asymmetric Information.

Notes on Robinson Crusoe, chapters 38 through 42

Microeconomics isn’t an unrealistic / useless science. It’s true Varian’s Intermediate Microeconomics  textbook addresses market failures vaguely, but I believe we must walk before we can run, and, therefore, it didn’t bother me to think the economic world surrounded by hypothesis for a while prior to aiming at the complexity of human being. I’m not saying my gun is loaded and ready to shoot, but, little by little, as I keep trying to merge different analytical tools or scientific viewpoints (if you will) and widen the analytical framework in which I view the world, I dare take a look at the human being as irreducible.

Anyway, Varian’s last chapter discusses one sort of market failure: Asymmetric Information. That’s the only chapter that loosen the Perfect Information hypothesis, for Asymmetric Information means that buyer and seller aren’t equally informed about the product in transaction; one would except that seller knows much more information than buyer about the good’s quality.

Asymmetric Information leads to Adverse Selection and Moral Hazard, but, as these concepts aren’t met by Robinson Crusoe through chapters 38 and 42, I shan’t talk about them.

A different implication of Asymmetric Information, however, comes into Robinson’s mind this week: the role of incentives.

“We turn now to a slightly different topic, the study of incentive systems. As it turns out, our investigation of this topic will naturally involve asymmetric information (…) The central question in the design of incentive systems is ‘How can I get someone to do something for me?’ ” (Varian, 2006, p.641).

That’s exactly what Robinson was asking himself the day before he met Friday, I.E., Thursday (Friday was named after the day he was saved by Robinson).

Precisely, after having a queer dream in which Robinson saved a savage from being eaten and he became his servant, Robinson started wondering whether that could actually happen. 

What kind of incentive would be necessary so that his servant would put maximum effort into work, or, in other words, what would cause a servant to by loyal and help him sail back home?

“If I could only get hold of a savage and teach him to love me, things might turn out just that way. He must be one of their prisoners and I must save him from being eaten; for then it will be easy to win his friendship”

One and half year later Robinson’s dream came true. Everything happened like he dreamt and Friday became his loyal servant.

The asymmetry of information regards knowledge about the ocean’s local conditions. Even though Robinson was a good sailor, he didn’t know the tide patterns at that particular region, actually he didn’t even know where he was. Therefore, Robinson figured that a savage would be necessary so he could get back home. However, also did he know, he needed a savage that was willing to help him, or else the savage could take him back to his tribe. He needed a servant / friend.

Saving a savage from death, thought Robinson, was the only incentive that could make a savage work for him with his maximum effort. 

He figured it right, for Friday would do everything to please Crusoe from that day on…

(33-37) The savages AKA The satiation point eaters.

Notes on Robinson Crusoe, Chapters 33 through 37.

“I had been on the island eighteen years before I saw the first footprint. I had been there twenty-three years before I saw any other signs of savages. It was likely that many more years would pass before any harm should come to me”

This week’s reading of Robinson Crusoe rendered fragments to reinforce the concept I talked about last time, satiation point.

Last week I said that Robinson had reached the satiation point within the confines of the Island². That is to say Robinson wasn’t quite satiated, after all he would very much enjoy leaving the Island, if he dared. But, as we’ve seen, he stopped daring to undertake such an adventure after his first attempt to do so. Nevertheless, once he gave up the idea of leaving the Economic Island, he managed to harvest and produce everything he needed, thus reaching satiation point. 

However, when savages arrived at the Island in order to have their feast, not only they ate human beings, for they were cannibals; but, economically thinking, they actually ate Robinson Crusoe’s satiation point:

“I had now been twenty-three years on this island. If it had not been for fear of savages, I would have been the happiest man in the world. During all those years I had been very busy. I did not work all the time, as you know, but I amused myself in various ways (…) Thus I lived very pleasantly in my island home. I would have been content to live there always if I could have felt safe from savages"

---

2 Or the confines of the model, in economic analysis. That is, as I’ve pointed last week, when we let one of the goods be a composite good, the satiation point becomes unreachable. But, for a limited set of goods, satiation point is reasonable. That’s why Robinson’s story is so insightful to economists; it actually portrays a limited set of options and isolation of social influence, which is pretty much the starting point of microeconomics. 

(27 - 32) MicrOikonomia.

Notes on Robinson Crusoe, chapters 27 through 32. 

Aristotle,  Chrematistics, Oikonomia and Microeconomics, it's all on the island!

Economics is usually called the science of scarcity, which is a very proper definition concerning mainstream economics. Scarcity, put broadly, implies that people face trade-off when making choices. If we live in a world of scarcity, as we certainly do, people live below their “dream-bundle”. One may point that such a “dream-bundle” is unreachable, by definition. Philosophically, it could be argued that human beings are insatiable, and that provided to an agent his “dream-bundle”, automatically his “dream-bundle” would change into something else, even more expensive, probably out of his budget constraint. Aristotle’s distinction between “Oikonomia” and “Chrematistics” explores such idea. It’s ironic how the name Economics comes from “Oikonomia” but, actually, we live in a world of “Chrematistics”.  A world ruled by the monotonicity of preferences, meaning more is better.

In microeconomics we usually deal with two representative goods. In order to tackle the restrictiveness of these models, we define one of these goods as a composite good that stands for everything else, that is, the money left after you bought the actual good. If one of the goods is composite, than it’s hard to think that an individual will reach his satiation point, as Aristotle has shown. Satiation point, by the way, is the proper Microeconomic concept for what I have being calling “dream-bundle”, or, a bundle that has everything you want.

On the other hand, when we think of a finite number of real goods (by real I mean a non-composite good), the satiation point may be reached, according to Microeconomics analytical framework.

To place this discussion into Robinson Crusoe’s story, there are two different ways to answer whether or not Robinson Crusoe has reached the satiation point in the passage below:

 “Before coming to the island I had never milked a cow, much less a goat. I had never seen butter made, or even cheese. But I learned how to do everything of the kind. And now I had more butter and cheese than I could eat. After dinner it was my custom to go out for a stroll. How proud I was of my little kingdom! If you had seen me then, you would not have laughed. You would have been frightened. For a stranger-looking fellow you never saw. Be pleased to take a picture of me”.

For finite number of goods, or, in our story, considering the whole range of possibilities the island has offered Robinson, it can be said that Robinson has reached his satiation point, as depicted on the figure:

We have argued, however, that, in order to be more realistic, the model defines one of the goods as composite. In that sense, all other goods / states in the world should be included in the composite good. Thus, “leaving the island” is a desired good / state that Robinson has no idea how to pursue.

My point is that Robinson has reached the satiation point within the limits of the island / model. If we restrict the set of options it’s possible to conceptualize a satiation point. For instance, every day we reach our satiation point regarding hunger after lunching, or else we wouldn’t have stopped eating. But, as we loosen our model restrictiveness, expanding our bundle options, it becomes clear that such point is not reachable, prevailing, thus, monotone preferences. 

(20 - 26) The day Robinson learned Adam Smith's diamond-water paradox.

Notes on Robinson Crusoe, Chapters 20 through 26.

1 year has passed. Robinson had sown grains of barley and rice.

After doing so, he decided to take a big trip and explore the island, which took about a month. At the other side of the island, he looked to the horizon and saw land, but he couldn’t tell whether that was another island or the mainland of America.

Either way it was risky to go there, he thought, for there might be savages.

So he returned to his castle and harvested his grains, which quite pleased him.

At this point, seeing how much he had accomplished at the island with his bare hands (figure of speech), for the first time in the book Robinson felt actually happy about everything that happened:

“My life was much happier than it had been while I was sailing the seas. I took delight in many things that I had never cared for before”.

He enjoyed himself for a little while, but, a few chapters / months later, he started wondering whether he could live there for all his life:

“I was always trying to think of some way to escape from the island. True, I was living there with much comfort. I was happier than I had ever been while sailing the seas. But I longed to see other men. I longed for home and friends”.

Then he built such a huge and heavy canoe (big enough for twenty men), that he couldn’t manage to push it into water! After working very hard in such a non-sense project, he went back to his cave feeling foolish, sad and thoughtful…

This was the day when Robinson learned Adam Smith’s diamond-water paradox, or its solution, as the passage below shall demonstrate:

“Why should I be discontented and unhappy? I was the master of all that I saw. I might call myself the king of the island. I had all comforts of life. I had food in plenty. I might raise shiploads of grain, but there was no market for it. I had thousands of trees for timber and fuel, but no one wished to buy. I counted the money which I had brought from the ship. There were above a hundred pieces of gold and silver; but of what use were they? I would have given all for a handful of peas or beans to plant. I would have given all for a bottle of ink”.

(16-19) The importance of being idle

Notes on Robinson Crusoe, Chapters 16  through 19.

The importance of being idle is an idea that Robinson would never support.

Even when the rain got tougher, and he could not get out of his cave, he would work inside of it in order to widen his house (or kitchen as he named it).

After 10 months on the island, Robinson has built a castle and a summer house. He has learned to dry grapes and make raisins, which fed him during winter.

Probably his attitude toward labor prevented him from getting mad. Had he followed the Greeks and their idle worship, instead of working hard every day of his life on the island, he wouldn’t have raisins when the first winter arrived. Or, even worse, he would go completely crazy after a few days. The calm days would be dull and the rainy days would be quite scary without his fortress to shelter him.

The Greeks had slaves to work physically while they worked their minds.

In that context, idleness might have had a positive outcome in terms of how much beautiful knowledge the Greeks have given us. 

It would be nice, however, if we could ask a Greek slave whether he agrees with this statement...

(12 - 15) The Economics Island

Notes on Robinson Crusoe, Chapters 12 through 15:

The Economics Island: Microeconomics, Keynes and Marx.

Usually economists use Robinson’s example to illustrate Microeconomics concepts, and that’s pretty useful, after all Microeconomics tries to understand the human being mindset without considering social / institutional feedback effects over the individual.

That’s probably a very poor definition, but I hope it helps you understand why Robinson is such a lovely character to us economists (so glad I can finally say that!).

The Economics Island, though, makes one wonder about other economists, and how well would their theories fit into this story. Particularly, I wonder, would Marx’s “Commodity Fetishism” or Keynes’ “Liquidity Preference” be related to the book? Maybe I’m way out of line here, but I believe both authors explain quite well this passage:

“ The last thing I found was a secret drawer in the cabin. In that drawer there was some money (…) I smiled to myself when I say this money. ‘O useless stuff!’ I cried. ‘What are you good for now? You are not worth picking up. This little old knife is worth much more. I have no manner of use for you. Lie there, where you are, and go to the bottom’. I was about to leave the cabin when I looked around again. The bright pieces were so pretty that I could not bear to leave them.”

Isn’t this passion for money, even in a situation where it can’t be used, somewhat surprising?

It makes me think about the intrinsic value of money, or how people valuate money independently of the goods that it can buy. Keynes explains why people leave bequest to their children using the intrinsic value of money argument, for instance, and, the very same concept suits pretty well the passage above.

Perhaps Marx’s “Commodity Fetishism” shall be evoked. I would definitely do that if I could.

I suppose this concept is also related to the passage above, but, I’m not sure that I can prove my point, so, let’s just keep that as a hypothesis for now…

(7 - 11) Protestantism, Labour and Salvation

Notes on Robinson Crusoe, Chapters  7 through 11.

Robinson sat down and cried like a baby, after all he was a human being,

not a robot. But he soon held his tears and started thinking about the wild  

animals that could be near him. If Robinson had kept crying and complaining

about his situation, he could have died that first night, but, instead of

lamenting, he was smart enough to climb a tree and spend a sound night.

In the next morning the main subject of the book finally appears:

Labour and Salvation.

Robinson soon finds out that only hard work will keep him alive on this

Island. The relation Labour / Salvation, portrayed by Protestantism, is key to

Robinson’s  survival on the island. On his second day, Robinson has to work a

lot in order to build a raft and bring food and some other things from the ship to

the shore. He manages to bring everything ashore and, all his sweat will

definitely pay off sooner or later.

We already knew that Robinson is a brave man. Now we have found

out that he is a very clever and patient man as well. Will these skills be enough

to keep him alive?

He has guns, powder, food, clothes, tools, courage and brains, what else

does he need to survive in such a wild environment?

Perhaps some luck?

(1 - 6) Robinson Crusoe in the Economics Island

Audiobook: http://www.booksshouldbefree.com/book/robinson-crusoe-written-anew-for-children-by-james-baldwin

Ebook: http://trwheeler.com/ebooks/crusoe_adapted.pd

Notes on Robinson Crusoe, Chapters 1 through 6.

Amazing story, I can't wait to read the next chapters.

Everything happens very fast...

From a boy in old York who wanted to be a sailor to a grown man cast away in a strange island!

Does he regret not listening to his parents?

It's hard to answer to this question. He is probably scared now, seeing all his mates are dead. But, still, I don't think he regrets; after all he wanted to be a sailor and a sailor he has become!

We will have to continue reading the book so we can answer to that question, but we have already seen that Robinson is a very brave man, so I think he will figure out how to survive at this island.