Why Economics Remains a Dismal Science

It has been awhile. I’ve been on “vacation”. A Dutch / American reunion of sorts.

But now I’m back and on the road again which means I read USAToday.

I find the USAToday puzzles page (last inside pages of the Life Section) ideal for take offs and landings since they don’t have an on or off switch. That is, the flight attendants aren’t pestering me about turning off the games on my BlackBerry … and USAToday has puzzles that I can actually do (as opposed to the impossible and oftentimes insipid crosswords by Will Short in the NYTimes).

So as I pulled out Tuesday’s USAToday on a flight home from Boston my eyes rested on a feature story on billionaire George Soros and the promotion of his book. Seems that George is hawking something called “reflexivity.” The relevant summary of Soros’ theory of reflexivity from the USAToday piece goes something like this …

Classic free market theory holds that everyone in an economy acts rationally, based on complete information while seeking to maximize their individual welfare or profits … To Soros, the conventional approach is rubbish. Instead of a world of near-identical actors, coolly assessing their economic interests and acting with clear-eyed precision, he sees a world (and markets) governed by passion, bias and self-reinforcing errors. Because fallible human beings are both involved in, and trying to make sense of, this world, they inevitably make mistakes. … Standard economic theory is flawed, Soros says, because it treats markets populated by thinking human beings as if they operated according to the natural laws that govern atoms and molecules.

Not surprisingly, those economists entrenched in classic rational economic theory don’t view kindly on reflexivity. According to USAToday’s David Lynch:

Critics of reflexivity, especially among the economists Soros disparages, have been brutal. A reviewer of one of his earlier books savaged his “windy amateur philosophy” and attacked him for being unfamiliar with basic economics … “It is difficult to conceive of a more mistaken understanding of the profession’s research in the last 10-15 years. … The great danger of the (earlier) book is that non-economists will take seriously his ill-founded criticism of economic research,” wrote economist Christopher Neely of the Federal Reserve Bank of St. Louis.

The Juice Bar has devoted several posts to the very obvious observation that people — including me — are NOT rational. The most recent was back in February coinciding with the release of Dan Airley’s book, Predictably Irrational.

So I’m naturally inclined to be open to this “ill-founded” reflexivity theory since it appears to track with reality over theory.

Then I think to myself …

Soros has made billions of dollars using his reflexivity theory … Neely oversees billions of dollars using his rational choice economic model.  Soros is so wealthy he can’t give his money away fast enough.  The U.S. economy has lurched from crisis to crisis with the dollar in the tank and skyrocketing debt.

Who ya gonna believe?

Not surprisingly, if I had to choose on who I’d want managing my money, I think I’ll go with Soros over Governor Neely of the Federal Reserve.  That is, I’ll go with someone who recognizes that people are emotional, non-linear, and, yes, irrational beings.

And this is why economics remains a dismal science.  Because it continues to refuse to accept the emotional and wacky things that make us all human.

Now … on to the sudoku page.

The Anti-Web Site Web Site

Check out Modernista! They are the advertising agency behind such brands as Hummer, Cadillac, and TIAA-CREF.

Modernista!’s non-site-site was brought to my attention by Bill Mount of Trephine Inc. via John Brodeur, both of whom are working on the new web site for the agency I work for, approporiately called, Brodeur.

In the words of Bill, Modernista! may have …

… created the first ‘siteless website’ and, in so doing, have sent the message that these are people for whom unconventional thinking is like breathing (they didn’t say ‘we’re unconventional’, they proved it in th every form of their communication). They ‘simply’ appropriated parts of the web that everybody’s already familiar with and used them to tell the Modernista! story:

* About us is on Wikipedia
* Leadership team bios are on Facebook
* The TV reel is on YouTube
* The Print Portfolio is on Flicker.

And it is all bound together by a discreet, little red banner in the upper left corner of your browser. Damn! I mean, seriously. Damn!

I don’t know if Brodeur’s going to have a “siteless website” but the Modernista! approach shows the power .. and the logical extension? .. of true social media.

I agree with Bill.

Damn!

Keep the Change

There’s the change we embrace and the change we fear.

And then there’s the change that never happens.

The change we embrace — or at least claim to — can be found in the current presidential race. Its as if Carville’s sign was hung on the door of every campaign headquarters — both Republican and Democrat — to read “It’s the Change stupid!”

According to a recently released AP-Yahoo survey, people actually believe (or say they believe) that a president can change things:

Large majorities of voters believe the president has considerable sway on a range of big issues such as inflation, interest rates, the federal deficit, taxes and more. Fully three-quarters believe the president has at least some influence over health care costs, for example. Sixty-nine percent can see the president making gasoline prices go up or down.

Make gas prices go up and down? That’s executive privelege!

Maybe that is why the candidates are flocking to the change mantra. According to a review of presidential candidate advertising by the University of Wisconsin Advertising Project:

Obama and Romney were the candidates of “change,” repeating that mantra in one-third of their ads, while Clinton, slow to embrace the term in her messaging, still managed to use it in more than one-quarter of her TV spots.

Then there is the change we fear — climate change. And the only way to change climate change is to change the way we do business.

That is, when it comes to climate change we have to change to change the change.

In my experience, people don’t like change. And even when they recognize the need for change they have a helluva time trying to get themselves to do it.

That goes from the personal — changing personal behaviors and habits — to the institutional — changing the way things operate in your house or your business.

The next time you go to the bookstore check out the “self help” section. Self help is code for “I (think) I need to change but can’t.”

Or read the latest books on sales and marketing. Getting folks to “change” (read: buy) is big business. In fact, there are entire business sectors making billions of dollars just to help people and businesses do what everyone now seems to say they do — change.

Change is exciting. But it isn’t easy. And in my experience it typically translates into — “let’s change … you first.”

Or in the words of Mark Twain: “The only person who likes change is a baby with a wet diaper.”

I think Twain was right. People are sometimes like babies with wet diapers. We want someone to be our mother and change us.

We will have a new president in 2008 and with that will certainly be some change. What we do with it is another matter.