Michael (![[info]](http://p-stat.livejournal.com/img/userinfo.gif){kind=small} raccaldin36) wrote,@ 2006-10-28 04:14:00 |
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The Science of Choice
Economics has long been known, in Thomas Carlyle's famous phrasing, as the dismal science. But he spoke poorly, in the context of the 19th century: life wasn't so hot, back then. People are, arguably, far more intelligent as a whole, and certainly more knowledgeable. Oh, sure: if you're speaking in terms of percentages, then no, we haven't really made that much headway. But if you talk in absolutes, then you can't even question the premise that we have made advancements in the past two centuries. The world is not so dismal, today, and our predictions may be bright, cheery, and optimistic.
I therefore rename economics as "The Science of Choice". In this essay, I expect to ultimately explain why I choose this epithet, and range across the gamut of humanity in doing so.
What is Economics?
Every field of science has its central, defining question. In biology, it is "How does life work?" In cosmology, "How did the universe begin?" In sociology, "How do human societies interact?" Of course, some sciences overlap with others, and others are subsets of greater sciences, but they all have their definitive question, never answered, but striven towards. In economics, the question is, "How is a decision made?"
You wonder, at that, I imagine: is that not the domain of psychology? Indeed, economics is partly a subset of psychology. A paper, called Prospect Theory, made a great impact on the field of economics; its authors were both psychologists. However, the economics of the individual, which is what prospect theory deals with, are a part of a subset of economics called microeconomics.
If you wish to understand why you make or made a decision, it may prove enlightening to study Tversky and Kahneman's Prospect Theory. I have certainly heard no good psychologist's explanation on the subject that comes close to matching it.
The remainder of the field of microeconomics is a study of sociology: organizations, whether they be teams, clubs, societies, partnerships, corporations, and so on. I therefore turn to the subject of macroeconomics, and in this field economics holds no overlap with any other science. Macroeconomic theory is the indisputable governor of its domain, and we have enshrined it, as we would any other science, in the common tongue. We call it "the economy", an abstract and sanitized thing, full of unpredictable curiosities and questionable calculations. Such is macroeconomics.
The economy is manifold: it is the economy of any political body, though its principles could certainly be applied to any collection of persons. It helps if the group is of sufficient size that statistics become meaningful; it's easier to be abstract and beardy, then. Thus we get notions like Gross Domestic or National Product. It is an illusion, to be sure, but a very valid one that our economy is ours. But you also have economic indicators such as the famous Gross National Happiness, of the nation of Bhutan.
This brings us back in line, and sobers our paradisical imagination of economics into a memory of drab numbers and dismal calculations. It is said that every man has his price, but it is also said that money cannot buy happiness. Are these sayings true, or are they outdated cliches of a bygone age? I would put forward that they are both true, when one picks his explanation and interpretation clearly. And I would do so by delivering the answer to the grand question of economics.
How is a decision made? The choice that yields greatest perceived value is always selected.
The astute reader will have immediately picked up that I have invoked the age-old argument of the Rational Man. But the more astute reader will have noted the presence of a word that doesn't quite belong: "perceived". You see, now, psychology's shadow looming across our science. Perception is important. But this word is not the key word in the answer. The key is the word "value".
What is Value?
Everyone who paid attention in high school economics will recall the memorable laws of supply and demand. They will recall that these laws can be plotted as curves on axes of price and quantity. However, it is doubtful that most were taught one niggling detail: price is not money.
Let us pose a definition for price: price is that which you give in return for a good or service.
So while it is very easy to see that the price of one egg is one dollar, it is a surprising twist to note that the price of one dollar is one egg. Let's be very clear: the barter system has never gone away. Barter, strictly defined, has. But the essential understanding of barter is a trade of goods and services where both parties agree that the value is reasonably equal. In the case between yourself and the farmer, the egg and the dollar are considered to have equal value.
Here, value and price can be considered roughly synonymous. The distinction I prefer to make is that value comes before the exchange, whereas price is after the exchange. Value is what I would pay for it; price is what I did pay for it. The detail is irrelevant. Consider the two words interchangeable.
But wait!
Let's say you value your spouse. Oh, dear: synonymity means that you can substitute one word for the other. The sentence would then read "You price your spouse." My, what a horrid sentiment. And it is here that I remind you: price is not money. Consider the question, "What would you give up your spouse for?" If the answer is, "A million dollars," then you have priced your spouse at a million dollars. If the answer is, "An aircraft carrier," then you have priced the poor fellow as of comparable value to an aircraft carrier. If the answer is, "Not a thing in the world!," then the lucky soul happens to be of greater value to you than anything else you are aware of in the world.
Did you notice my slip? I said, "to you". We have a reasonably strong grasp of what value is, now, so we return to the answer to the question of economics for a reminder: the selected choice is that which has the greatest perceived value.
What is Quality of Life?
Simply put: quality of life is defined as the total amount of value an individual is perceived to have. This perception may be held by the individual themself, or by another. We assume, for instance, that a rich man has a high quality of life, though he may indeed be very miserable (perceives very little value in his life).
So defined, we may now restate the answer to the question of economics: a decision is made by selecting the choice with the highest resultant quality of life. This is an abstract, and therefore overarching statement. ALL decisions follow this rule.
Now we may reconsider the words "income", "profit", "cost", and their siblings in new light. I leave that as an exercise for the reader.
Since the discussion on value, I have restricted myself to examples concerning one or two individuals. However, as aforementioned, this is generalizable all the way from the individual to the transnationally organizational. At a microeconomic scale, it is simpler to recognize that a person will always choose to increase value in their life. (This, by the way, is why the compassion component in my definition of love is so important. Comprehension would be just icing on the cake, if all I had hoped for was to meld self-interest with altruism.) At a macroeconomic scale, we are given to understand that the leaders and governors of our economy--in America, the President and his staff, Congress, and the Federal Reserve--make grander decisions on our behalf.
In macroeconomics, or so the theory goes, disposable income is an explicit participant in gross domestic product. Thus, as GDP grows, so does disposable income. (Disposable income is defined as the money one has left over after taxes and expenses; in other words, spending money.) So the GDP is an effective metric. In theory. Wikipedia's article on Gross National Happiness includes sufficient suggestions of nonstandard indicators and criticisms of the GDP approach for your own perusal. Suffice to say: the U.S.'s GDP may be growing lickety split, but my wallet sure ain't.
But to continue in the vein of theory, spending money is supposed to be the source of one's happiness. We already know the modern response to that. A brief discussion on the problem of money will follow this essay, which merits one last section heading.
Why does any of this matter?
Because we want people to decide things in ways that we agree with. We want people to vote. We want people to conserve energy. We want people to give to charity. We want people to do so many things, and even individually, we want individuals to do specific things, like taking out the trash every week. How do we do that? How can our understanding of how a decision is made give us the power to convince a decision out of someone?
The answer, of course, is quality of life. Is value.
Why don't people vote? Because they perceive no value added from the action.
Less idealistically, we can see here why business is the land from which we may draw megatons of understanding. The realm of business is the realm of getting people to do what you want them to: giving you money. Appropriately, successful churches have learned the great tricks of business. Every successful endeavor has either appropriated its greatest techniques from the world of business, or business has taken the lesson from that endeavor and incorporated it into its playbook.
And it's not simply business, either. It's the public face of business: marketing. If you want to know how to affect the decisions of other people, you have several choices. You can be born talented--too late for that, now!--or you can learn psychology or you can learn marketing, which is simply applied psychology.
I am not happy with my conclusion. It cuts to the bone against many ideals. But it is, as far as I can see, very true. Unmistakably so, to the point where to deny it would be to speak a falsehood. Ironically, I am not utilizing marketing precepts in this essay, as I ought to. I am not a master of them, nor have I really understood them; I am merely sure they are right.
PostScript: The Problem of Money
Money is the abstraction of value. The grand tragedy of money is that it was supposed to stand in as a proxy to value, to represent it perfectly. But nothing is perfect, and the great problem of money is that it exists, and just like anything else, can therefore become a commmodity. That means that it can be bought and sold, but it is ultimately incapable of self-referential valuation.
This is the origin of foreign exchanges, and the valuation of currencies, and so on. Then, what does it mean that money cannot buy happiness? Money, the once-perfect valuator, and happiness, the phantom represented by quality of life... together in the same pithy remark. It means that money, at the end of the day, is just pieces of paper, smelted metals, bits of ones and zeroes. A chasing of the wind, non-existant.
As a result, money can very easily be worth less than whatever price you must pay for an increased quality of life. Excepting mail-order brides from Russia, you cannot buy love. An intricate and verdant design on a standard-sized bit of dried wood pulp cannot equate to a friend. Do these things have their price? Yes, they do. But that price may be indescribable indeed. We do not remember great persons of history for their matrimonial tenderness; indeed, most of them couldn't quite figure out how to be monogamous, or instead opted to toss the opposite out of the sheets entirely.
[added from here]
Capitalism and economics are not necessarily related. One does not connote the other. Capitalism is not an economic model I agree with, but it is certainly the most effective that I have seen in practice. I prefer others, and give distinct preference to non-monetary systems, such as communism, but I also have to admit that they're not effective in supporting value gain by individuals. Such is the power of market economics.
Economics has long been known, in Thomas Carlyle's famous phrasing, as the dismal science. But he spoke poorly, in the context of the 19th century: life wasn't so hot, back then. People are, arguably, far more intelligent as a whole, and certainly more knowledgeable. Oh, sure: if you're speaking in terms of percentages, then no, we haven't really made that much headway. But if you talk in absolutes, then you can't even question the premise that we have made advancements in the past two centuries. The world is not so dismal, today, and our predictions may be bright, cheery, and optimistic.
I therefore rename economics as "The Science of Choice". In this essay, I expect to ultimately explain why I choose this epithet, and range across the gamut of humanity in doing so.
What is Economics?
Every field of science has its central, defining question. In biology, it is "How does life work?" In cosmology, "How did the universe begin?" In sociology, "How do human societies interact?" Of course, some sciences overlap with others, and others are subsets of greater sciences, but they all have their definitive question, never answered, but striven towards. In economics, the question is, "How is a decision made?"
You wonder, at that, I imagine: is that not the domain of psychology? Indeed, economics is partly a subset of psychology. A paper, called Prospect Theory, made a great impact on the field of economics; its authors were both psychologists. However, the economics of the individual, which is what prospect theory deals with, are a part of a subset of economics called microeconomics.
If you wish to understand why you make or made a decision, it may prove enlightening to study Tversky and Kahneman's Prospect Theory. I have certainly heard no good psychologist's explanation on the subject that comes close to matching it.
The remainder of the field of microeconomics is a study of sociology: organizations, whether they be teams, clubs, societies, partnerships, corporations, and so on. I therefore turn to the subject of macroeconomics, and in this field economics holds no overlap with any other science. Macroeconomic theory is the indisputable governor of its domain, and we have enshrined it, as we would any other science, in the common tongue. We call it "the economy", an abstract and sanitized thing, full of unpredictable curiosities and questionable calculations. Such is macroeconomics.
The economy is manifold: it is the economy of any political body, though its principles could certainly be applied to any collection of persons. It helps if the group is of sufficient size that statistics become meaningful; it's easier to be abstract and beardy, then. Thus we get notions like Gross Domestic or National Product. It is an illusion, to be sure, but a very valid one that our economy is ours. But you also have economic indicators such as the famous Gross National Happiness, of the nation of Bhutan.
This brings us back in line, and sobers our paradisical imagination of economics into a memory of drab numbers and dismal calculations. It is said that every man has his price, but it is also said that money cannot buy happiness. Are these sayings true, or are they outdated cliches of a bygone age? I would put forward that they are both true, when one picks his explanation and interpretation clearly. And I would do so by delivering the answer to the grand question of economics.
How is a decision made? The choice that yields greatest perceived value is always selected.
The astute reader will have immediately picked up that I have invoked the age-old argument of the Rational Man. But the more astute reader will have noted the presence of a word that doesn't quite belong: "perceived". You see, now, psychology's shadow looming across our science. Perception is important. But this word is not the key word in the answer. The key is the word "value".
What is Value?
Everyone who paid attention in high school economics will recall the memorable laws of supply and demand. They will recall that these laws can be plotted as curves on axes of price and quantity. However, it is doubtful that most were taught one niggling detail: price is not money.
Let us pose a definition for price: price is that which you give in return for a good or service.
So while it is very easy to see that the price of one egg is one dollar, it is a surprising twist to note that the price of one dollar is one egg. Let's be very clear: the barter system has never gone away. Barter, strictly defined, has. But the essential understanding of barter is a trade of goods and services where both parties agree that the value is reasonably equal. In the case between yourself and the farmer, the egg and the dollar are considered to have equal value.
Here, value and price can be considered roughly synonymous. The distinction I prefer to make is that value comes before the exchange, whereas price is after the exchange. Value is what I would pay for it; price is what I did pay for it. The detail is irrelevant. Consider the two words interchangeable.
But wait!
Let's say you value your spouse. Oh, dear: synonymity means that you can substitute one word for the other. The sentence would then read "You price your spouse." My, what a horrid sentiment. And it is here that I remind you: price is not money. Consider the question, "What would you give up your spouse for?" If the answer is, "A million dollars," then you have priced your spouse at a million dollars. If the answer is, "An aircraft carrier," then you have priced the poor fellow as of comparable value to an aircraft carrier. If the answer is, "Not a thing in the world!," then the lucky soul happens to be of greater value to you than anything else you are aware of in the world.
Did you notice my slip? I said, "to you". We have a reasonably strong grasp of what value is, now, so we return to the answer to the question of economics for a reminder: the selected choice is that which has the greatest perceived value.
What is Quality of Life?
Simply put: quality of life is defined as the total amount of value an individual is perceived to have. This perception may be held by the individual themself, or by another. We assume, for instance, that a rich man has a high quality of life, though he may indeed be very miserable (perceives very little value in his life).
So defined, we may now restate the answer to the question of economics: a decision is made by selecting the choice with the highest resultant quality of life. This is an abstract, and therefore overarching statement. ALL decisions follow this rule.
Now we may reconsider the words "income", "profit", "cost", and their siblings in new light. I leave that as an exercise for the reader.
Since the discussion on value, I have restricted myself to examples concerning one or two individuals. However, as aforementioned, this is generalizable all the way from the individual to the transnationally organizational. At a microeconomic scale, it is simpler to recognize that a person will always choose to increase value in their life. (This, by the way, is why the compassion component in my definition of love is so important. Comprehension would be just icing on the cake, if all I had hoped for was to meld self-interest with altruism.) At a macroeconomic scale, we are given to understand that the leaders and governors of our economy--in America, the President and his staff, Congress, and the Federal Reserve--make grander decisions on our behalf.
In macroeconomics, or so the theory goes, disposable income is an explicit participant in gross domestic product. Thus, as GDP grows, so does disposable income. (Disposable income is defined as the money one has left over after taxes and expenses; in other words, spending money.) So the GDP is an effective metric. In theory. Wikipedia's article on Gross National Happiness includes sufficient suggestions of nonstandard indicators and criticisms of the GDP approach for your own perusal. Suffice to say: the U.S.'s GDP may be growing lickety split, but my wallet sure ain't.
But to continue in the vein of theory, spending money is supposed to be the source of one's happiness. We already know the modern response to that. A brief discussion on the problem of money will follow this essay, which merits one last section heading.
Why does any of this matter?
Because we want people to decide things in ways that we agree with. We want people to vote. We want people to conserve energy. We want people to give to charity. We want people to do so many things, and even individually, we want individuals to do specific things, like taking out the trash every week. How do we do that? How can our understanding of how a decision is made give us the power to convince a decision out of someone?
The answer, of course, is quality of life. Is value.
Why don't people vote? Because they perceive no value added from the action.
Less idealistically, we can see here why business is the land from which we may draw megatons of understanding. The realm of business is the realm of getting people to do what you want them to: giving you money. Appropriately, successful churches have learned the great tricks of business. Every successful endeavor has either appropriated its greatest techniques from the world of business, or business has taken the lesson from that endeavor and incorporated it into its playbook.
And it's not simply business, either. It's the public face of business: marketing. If you want to know how to affect the decisions of other people, you have several choices. You can be born talented--too late for that, now!--or you can learn psychology or you can learn marketing, which is simply applied psychology.
I am not happy with my conclusion. It cuts to the bone against many ideals. But it is, as far as I can see, very true. Unmistakably so, to the point where to deny it would be to speak a falsehood. Ironically, I am not utilizing marketing precepts in this essay, as I ought to. I am not a master of them, nor have I really understood them; I am merely sure they are right.
PostScript: The Problem of Money
Money is the abstraction of value. The grand tragedy of money is that it was supposed to stand in as a proxy to value, to represent it perfectly. But nothing is perfect, and the great problem of money is that it exists, and just like anything else, can therefore become a commmodity. That means that it can be bought and sold, but it is ultimately incapable of self-referential valuation.
This is the origin of foreign exchanges, and the valuation of currencies, and so on. Then, what does it mean that money cannot buy happiness? Money, the once-perfect valuator, and happiness, the phantom represented by quality of life... together in the same pithy remark. It means that money, at the end of the day, is just pieces of paper, smelted metals, bits of ones and zeroes. A chasing of the wind, non-existant.
As a result, money can very easily be worth less than whatever price you must pay for an increased quality of life. Excepting mail-order brides from Russia, you cannot buy love. An intricate and verdant design on a standard-sized bit of dried wood pulp cannot equate to a friend. Do these things have their price? Yes, they do. But that price may be indescribable indeed. We do not remember great persons of history for their matrimonial tenderness; indeed, most of them couldn't quite figure out how to be monogamous, or instead opted to toss the opposite out of the sheets entirely.
[added from here]
Capitalism and economics are not necessarily related. One does not connote the other. Capitalism is not an economic model I agree with, but it is certainly the most effective that I have seen in practice. I prefer others, and give distinct preference to non-monetary systems, such as communism, but I also have to admit that they're not effective in supporting value gain by individuals. Such is the power of market economics.
