The Micro-Foundations Of Wrongness

I complain a lot about how all of economics is wrong. Apart from the work being done by scientists to observe human behavior in the field and amass piles of economic data, people with PhDs in economics divide their time between:

  1. Creating and solving Soduku puzzles, and
  2. Making broad moral pronouncements that they claim to have discovered through statistics and other maths.

You can play a game of whack-a-mole trying to point out the flaws in various manifestations of economics, but it would be helpful in a broader context if we could generalize about a few basic ideas that drive economic wrongness. Call it the search for the micro-foundations of economic wrongness. One of those micro-foundations is, of course, "micro-foundations": the requirement that large scale human behavior should be understood as the collection of small scale human behavior. What if behavior isn't additive like that? We wouldn't require climate change models to be built by adding together the behavior of individual air molecules, would we? Or worse (and this is what economists actually do!), we wouldn't try to predict climate change by understanding the atmosphere as one, giant, representative, air molecule? Which molecule? Carbon: we're toast already. Nitrogen: no greenhouse effect.

You're right. The micro-foundations response to the "Lucas Critique" is the fucking stupidest thing you've ever heard of. It is an idea that informs every single piece of policy advice that comes out of the economic academy and therefore directly causes the death of millions of poor people every year. It takes a great man to kill poor people on a daily basis, so they gave Robert Lucas a Nobel Prize! Now he gets to tell presidents how to run the world, meanwhile spewing relentlessly false predictions from the editorial page of the Wall Street Journal.


Wouldn't it be even more helpful to know how we go wrong in every endeavor, not just econ? The more we learn about human decision making, the more clearly we see that the bulk of it relies on two main factors:

  1. Emotion
  2. Rules of Thumb (conscious and unconscious).

Without these processes, we'd all be Hamlet, waisting away trying to make up our minds. The amazing thing is how we can still make quick decisions in a world massively more complex than the one our brains evolved to survive in. This is due to the fact that, while every other animal on Earth behaves in a way determined (more or less) by genetics and environment (two inputs), our behavior is shaped by genetics, environment, and culture (three inputs). Darwinian natural selection determines both our genetics and our culture, but the time scale is massively different.

For example, moving out of Africa and into less sunny locales led to the selection of genes generating white skin. This happened recently (in genetic terms), between 12 and 20 thousand years ago. Meanwhile, a similarly dramatic change in our culture evolved just 5 years ago, when the majority of humans on planet Earth added "online" to the world of social interaction. In genetic terms, that's like inventing an entirely new organ overnight. One day we don't have kidneys, the next day we do.

Back to rules of thumb:

The speed of cultural change has always led to problems, where "problems" is defined as "a high percentage of the population drops dead". See, e.g., the Black Death (where the culture of urbanization ran into the environment in the form of infectious disease). Sometimes we solve these problems unconsciously, (e.g., everyone without resistance to plague dies), but often consciously, by changing our rules of thumb.

Early on in agriculture/urbanization, tribal religions needed only small tweaks to continue working. But globalization required massive conscious intervention, as we invented and adopted the value of "toleration." It may seem like that value was always there, but history clearly describes its invention and spread during the Enlightenment. Prior to that, virtually every  human religion defined itself as the one true faith and described other faiths as more or less evil. That works great when those people live far enough away that they aren't competing for your food or shelter, or when they are a small, discreet, non-threatening minority (e.g., Jews in the Arab Empire of the Middle Ages). Necessity being the mother of invention meant that the globalization of the Enlightenment period also saw the invention of the ideas of "toleration" and "democratic pluralism". These became the new rules of thumb for how to judge people with different religious beliefs.

Wrongness Is A Natural Consequence of Cultural Evolution

So now we can see that large-scale wrongness is the fruit of a specific process: the failure of one area of culture to evolve to accommodate the rapid evolution of another area. Wrongness is what happens when Darwin's finch evolves a beak designed to open one kind of nut, but the world changes, leaving the poor finch to crack a new kind of nut with a new shell that his beak is ill-suited to open. The beak was great, but now it needs to evolve again.

Off the top of my head, here are some core rules of thumb that are no longer adaptive and need to "evolve again":

  1. Eat your vegetables.
  2. Doctors are scientists.
  3. It is useful to imagine that economic behavior is stable, i.e., "equilibrium" is a useful idea.
  4. The media helps preserve open democracy through behavior directed toward that goal (in reality, the benefits of "the press" are all the result of an invisible hand).
  5. Only some people qualify for university education.
  6. Ideology is a useful concept for understanding political behavior.
  7. Economic growth is required for prosperity.
  8. Efficiency is a good thing (As in, reducing labor costs involved with producing a consumer good. Efficient use of natural resources is different.).

More to come (including links justifying the claims above)...