There’s been some interesting discussion in response to my earlier post about why we expect too much from economists, although a lot of the comments miss my larger point. What I was trying to say is that economics might not entirely be up to the task of explaining what we generally consider to be economic phenomena because we are overconfident about what the discipline has the ability to account for. You might call this the Freakonomics Fallacy. Whatever it is in the world we are trying to explain—crime, climate change, test scores—economics has the answer.

If this isn’t in fact true, then why would we think it? Again, to underscore a part of my earlier argument that I probably didn’t make forcefully enough: we think economics has all the answers because economics has become our major mode of understanding the social world around us. Charities are social businesses. Policy makers are cost-benefit analyzers. Education is a market.

This has not always been the case. In earlier eras, we were often more likely to understand human behavior and social dynamics through other prisms, such as political science, sociology, psychology, anthropology or biology. Indeed, for better or for worse, many of these fields took a turn being the dominant social science. I’m not saying that one frame gives a more accurate or useful picture of the world than another. Just that each leads to a different way of understanding why things happen the way they do because each comes with its own set of assumptions and simplifications.

Now here is the part I didn’t talk about earlier. Using one frame over another may also lead to changes in perception and behavior. As economist Robert Frank once wrote, “Our beliefs about human nature help shape human nature itself.” I am indebted to Joe Magee for pointing me to this fantastic paper (PDF), which explains how the economic world view might be influencing us to act more in line with its assumptions—such as the primacy of self-interest in how people make decisions. The paper includes a number of great examples, including how the Chicago Board Options Exchange wound up conforming to option-pricing theory and why companies often think layoffs are the path to maximum value. Here’s a more trivial, although particularly salient, illustration that involves people playing the prisoner’s dilemma:

[The] game was called, in one instance, the Wall Street Game and, in the other, the Community Game. This simple priming using different language produced differences in participants’ choice of moves, as well as differences in the moves subjects anticipated from their counterparts. When the game was called the Community Game, “mutual cooperation was the rule. . .and mutual defection was the exception. . . . whereas the opposite was the case in the Wall St. Game” (Liberman et al., 2003: 15). Both participants and those that nominated them did not anticipate the extent to which this simple labeling or naming affected responses, and subjects’ responses to the situation were much more strongly predicted by the name of the situation than by the person’s presumed likelihood and reputation for being cooperative or defecting.

The same payoff matrix
and game was called, in one instance, the
Wall Street Game and, in the other, the Community
Game. This simple priming using different
language produced differences in participants’
choice of moves, as well as differences in the
moves subjects anticipated from their counterparts.
When the game was called the Community
Game, “mutual cooperation was the rule. . .
and mutual defection was the exception. . . .
whereas the opposite was the case in the Wall
St. Game” (Liberman et al., 2003: 15). Both participants
and those that nominated them did not
anticipate the extent to which this simple labeling
or naming affected responses, and subjects’
responses to the situation were much more
strongly predicted by the name of the situation
than by the person’s presumed likelihood and
reputation for being cooperative or defecting.

This is not an indictment of the economic world view, nor a way of complaining about how it has won out out above all others for all time (it hasn’t). Rather, this is simply a friendly reminder that we have all, to a large extent, adopted this world view as our own—and that has altered both the way we perceive problems, as well as the way we analyze and try to solve them. But this way of understanding  the world is, ultimately, only one of many. In certain circumstances it will fail. Economics cannot explain everything that comes our way. But sometimes we’re too enmeshed in economic thinking to see that.