Why understanding economics is hard: This is a wonderful, thought-provoking article that has implications for all relationships, economic and otherwise.

Link is dead, so read cached copy below.

The Economy | Revealed:
Why understanding economics is hard
By Andrew Cassel
Inquirer Columnist

I finally understand why economics is so hard for many people to grasp.

It's not because of complexity. The rules of supply and demand aren't inherently more difficult to fathom than those that apply to, say, politics, or cooking, or sports.

Yet while most people have no trouble wrapping their brains around these subjects - indeed, millions will be eagerly absorbing their finer points this weekend - (What are you watching: Meet the Press, celebrity chefs or college football?) - few have a similar appetite for economics.

And now I know why, thanks to Alan Fiske.

Fiske, a professor of anthropology at UCLA who previously taught at Penn and Bryn Mawr, has devoted decades of research to disentangling human relationships. He's studied communities all over the world, comparing cultures in West Africa with those in Europe and America.

His conclusion: Just as every human language is composed of the same grammatical elements (subjects, verbs, etc.), all relationships are built from exactly four kinds of interactions.

Fiske labels these communal sharing, equality matching, authority ranking and market pricing. Here's what he means:

Communal sharing is how you treat your immediate family: All for one and one for all. Or as Marx put it: From each according to ability, to each according to need.

Equality matching, by contrast, means we all take turns. From kindergarten to the town meeting, it's all about fair shares, reciprocity, doing your part.

Authority ranking is how tribes function, not to mention armies, corporations and governments. Know your place, obey orders, and hail to the chief.

Market pricing, of course, is the basis of economics. It's what we do whenever we weigh costs and benefits, trade up (or down), save or invest.

Don't get Fiske wrong: He's not saying that each relationship in your life fits into one of these four slots. Rather, these are paradigms - mental models - that we use to help make sense of our interactions.

When there are conflicts, moreover, Fiske maintains it's often because we aren't all using the same model.

For example, you might see housework as a communal-sharing function, while your spouse approaches it as equality-matching. Neither is wrong, yet you still end up angry or guilty when the laundry isn't done.

The same problem can afflict whole societies, as Fiske described to me recently. "The Danes pride themselves on being fair," he said. "They can't understand why they don't get along with their Middle Eastern immigrants."

But Fiske does: "The immigrants expect authority ranking. The Danes expect strict equality matching. Each side sees people constantly violating the models."

To call this a far-reaching theory is probably a gross understatement. The more I think about it, the more it seems to fit and explain.

Does the boss have a leadership problem? Maybe it's because she has a communal-sharing model in her head, while the troops are mainly into authority-ranking. Or vice versa.

But what is particularly interesting is the role of market pricing, which Fiske speculates might have been the last to evolve in our prehistoric ancestors' brains.

It makes sense. For hunter-gatherers in small bands, sharing, matching and ranking were probably as fundamental to survival as eating and breeding. But market pricing involves complex choices based on mathematical ratios.

"It's the difference between addition and subtraction on one hand, multiplication and division on the other," Fiske says.

Commerce and global trade, of course, require a finely honed version of the market-pricing model. But if humans developed this model relatively late, it might well be less than universal, even today.

In other words, to have an intuitive grasp of economics, you might just need to take a step or two up the evolutionary ladder.

Naked Economics
Undressing the Dismal Science
by Charles Wheelan

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~psikeyhackr — 05 February 2007, 19:23http://www.spectacle.org/1199/wargame.html

Doing a cost benefit analysis becomes more and more of a problem as technology becomes more complex. I dealt with stereos before I switched to computers in 1980. Most of the consumers don't really understand the meaning of the specifications or how much of a benefit they are, so sales becomes a lot of psychological nonsense.

Then we have economists that don't talk about the depreciation of all of this garbage.

How much do Americans lose on depreciation of automobiles each year? Economics is difficult to understand because economists leave out relevant information.


~Brent — 06 February 2007, 16:23

That link to the pbs site was fascinating. Thanks for sharing it. Can't say I understood it all. I see the idea that we do not account for depreciation on the consumer side. But I'll need to examine the arguments more carefully to understand why that's important. Conceptually, I see that the accounting value of all that "stuff" we buy is decreasing in value -- our consumer side net value of assets. But since those "assets" only depreciate, they don't generated income, we differ from the business side of the equation. We consume. That's all we do. And what we consume depreciates. It rarely earns income. So we're digging ourselves a deeper and deeper hole (net worth wise) by continuing to buy new product that depreciate to zero. While business spends on some captial that produces income. It's an inherent inbalance...

Is this saying consumers need to save, to generate income from their saving (or investments). Or is income from a job enough to keep the net worth balance between business and consumer...I think I'm one of the confused ones. Will need to ponder this more.

~psikeyhackr — 23 February 2007, 09:48

Depreciation is unavoidable but it is wise to try to minimize it and on a national and global scale it is important to ask if corporations are doing things to maximize our depreciation. Suppose for the sake of argument that automobile companies could cut the price of cars in half while doubling their useful life. This would mean 1/4th as much depreciation for consumers. But suppose in order to do this the manufacturers had to reduce the number of models and stop changing them every year. Would manufacturers do this if it reduced their profits? Do consumers want this? Would consumers be more likely to want it if economists told them how much they were losing on depreciation each year? And then one must consider the side effects. Shouldn't the cost of insurance go down? Wouldn't the auto loans be smaller therefore consumers would pay less interest? Couldn't consumers use that money to pay off mortgages at an accelerated rate? Do banks want consumers to be smart.

But on a global scale this brings up another issue. Planned obsolescence means unnecessary manufacturing. That means unnecessary pollution. Does that mean potential global warming just to make garbage so we can run on a treadmill to increase GDP?

Economic Wargames


~Brent — 07 November 2007, 13:49

These are excellent points! Thanks for sharing them. And I really like that article you recommend, Economic Wargames. This depreciation issue is quite profound and far-reaching when you think about it.