Although my thinking about economics is more in disarray than it has ever been, I think it’s time for me to put together a collection of posts on the topic. I say “collection” rather than “series” because I am nowhere near being able to organize my thoughts into a nice, neat progression. But those thoughts are now far enough outside the mainstream that they will probably make for reading that is at least thought-provoking, if not instructive.
I am collecting these posts under the phrase “folk economics” for a reason. Back in my early computer career I worked in an artificial intelligence research lab, and one of the topics of study was called “naive physics” or “folk physics”, referring to physics as people intuitively understand it as opposed to physics as a scientific theory. Folk physics would never make it as a scientific theory, since it is not comprehensive and sometimes inconsistent. But folk physics will get you through the day, that is, it is sufficient for navigating everyday life. More important, I think a case can be made that when folk physics clashes with scientific physics, it is not enough to discard our intuitions as unreliable; something reasonable must be said about why people misunderstand, or else we need to take a long skeptical look at what the scientific theory is telling us.
Folk economics, then, is an intuitive as opposed to a scientific understanding of economic behavior. This is not to say, though, that it is simply an account of the average person’s intuitive understanding. That understanding is often mistaken, but I would say the mistakes are due to not having thought things through; one’s intuitions can be corrected, so to speak, by further thinking and observation. Unlike a scientific theory, though, the goal of folk economics is not to give a comprehensive and consistent account of economic behavior, but instead to develop a set of intuitions which will serve a person well in dealing with any economic situation he might encounter.
(Incidentally, a professor of economics at Emory University, Paul Rubin, has written a paper entitled “Folk Economics,” but his idea of folk economics is different than mine. Since the term doesn’t seem to be used otherwise, I hope it won’t be confusing if I fill it with my own meaning.)
I am not working out an idea of folk economics because I am too lazy or too stupid to grasp the real, scientific version. I understand scientific economic theory well enough, at least in broad outline. But as I’ve been looking at the history of economic behavior, especially in agrarian cultures, I have found that the standard classical theory developed by Adam Smith and his followers not only does not give a very satisfying account of what actually happens between people, in many instances it makes claims that are simply hard for an average person to swallow. It violates our intuitions about how things are or should be. And so I’ve spent more and more time looking at the various claims of classical economic theory, and asking naive questions about them: is this how people actually behave? Is this how they ought to behave? Is this result a good result?
As I’ve asked these questions, I’ve discovered that others have also had serious questions about classical economic theory, people who are much smarter than me and so have been able to propose alternative theories that address the flaws they claim the classical theory suffers from. None of those alternatives has fully persuaded me, but most of them have taught me something. Although this collection of posts is primarily devoted to raising questions about the classical theory, I will also discuss those alternatives if and when it seems useful.
What I’ve written above sounds way more formal than I hoped it would. If it suggests in any way that I will be formulating some kind of alternative theory, even an informal one, rest assured that I won’t. All I intend to do is to raise some questions about the current conventional economic wisdom, and most of those questions will be wrapped up in stories. For example, I will start out taking a look at how prices are set, doing so by telling a bunch of anecdotes about how my experiences with prices haven’t synced up very well with what the classical theory tells me about prices.