Nature, Science and Psychology in Economics

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Nature in Economics

The economic process involves and affects a large number of aspects. While classical economics is concerned mostly with the entrepreneur, other economists have emphasized other economic players (Karl Marx the worker, Thorstein Veblein the technocrat, John Stuart Mill and John Maynard Keynes the government). But there has not been nearly enough discussion of a very important, although passive, element in the economic process; and this oversight in economic theory has cost dearly to economic vibrancy and to the health of the world.

That element is nature.

In libertarian capitalism, property is described as nature converted into productive use. But no value is seen for nature. With a major input into the economic process, that is greatly affected by the economic process, and whose health has great effects on people's health, quality of life, and economic vibrancy, not being valued or quantified, the pricing system of capitalism fails to quantify a vast range of its effects. And this has resulted in the worst aspects of capitalism: The failure to disincentivize blind and destructive practices such as the burning of Amazon rainforest to make ranches that last for two years at the conclusion of which the land is desertified; and the failure to incentivize intelligent, ingenious, innovative practices that maximize utility to the consumer while minimizing destruction, pollution and waste.

While many people concerned for the well-being of the environment see capitalism itself as poison, I am not of the same opinion. Capitalism works correctly when both the inputs and outputs are rightfully priced. When economic activity fails to quantify what it destroys, pollutes and poisons - when for that reason it finds it profitable to destroy priceless treasures that man has not created and cannot conceivably recreate in order to realize minimal utility - the economic activity becomes destructive to a far greater extent than it becomes productive. And it is by quantifying these treasures for all that they have to offer people, as well as for what they intrinsically are, that can be disincentivized the myopia and destructiveness of an incompletely constituted capitalism while can be incentivized the ingenious and intelligent practices that actually create wealth.

When the Chinese government sought to quantify the health effects of economic activity throughout the nation, it had to suppress the survey, as it showed the health effects effectively bringing the economic growth in many regions to zero. The severity of health and environmental effects in places such as Linfen negates much of the growth achieved. Meanwhile there are plenty of effective and affordable smokestack and effluent filters on the market, and all it takes is quantifying the health and environmental effects and including them in the pricing to make it vastly profitable for the Chinese manufacturers to implement these filters and vastly reduce the damage of their economic activity to the health of the population.

The same is the case with economic system itself. Rainforest deforestation, ocean acidification, and global warming have only got as big as they did because nature has not been computed in economic process. And it is only by computing nature in economic process that capitalism stands to function as advertised, with incentivization for its benefits and disincentivization of the unnecessary destructive effects of incompletely constituted capitalism.

Science and Education in Economics

It is also important to understand and to quantify the extent to which science and education is an economic contributor. Most scientists and teachers do not make much money; but without science, business would have very little of what it has to sell, and the consumer would have very little of what he has. Without science, which is a government-funded, altruistically-valued endeavor, there would not be technology and engineering, both of which are applications of science. Which means that, without science, everything from cars and SUVs to computers, phones, appliances and medical equipment would not exist.

Furthermore, educators - both at primary level and at higher level - contribute vastly to the economy by making the people employable and possessing of marketable skills. Some education is private, but most is public, which once again reaffirms the government's contribution to economic well-being. This is not limited to education and science. The Interstate system, the Internet and the system for protection of property rights are all government projects, and without them the economy would be much less than its present size.

Psychology in Economics

The premise of classical economics is that people are driven in their consumption decisions by rational self-interest. It is a worthy endeavor to find out what actually drives people in their consumption decisions.

There are many people who spend large amounts of money to procure products that are fashionable when they could get similar utility from products that are not fashionable that cost much less. Is it rational to spend big money on clothes and shoes simply because they are fashionable, when one could get same utility from clothes and shoes that are not fashionable now but have been fashionable sometime previously at one tenth the price? Is it rational to spend big money on houses that are in style and then lose their value as they become out of style? Is it rational to go to expensive restaurants when same quality of food can be had from much cheaper venues? Is it rational to spend $100,000 on a Hummer when one could get a Jeep for one fifth that price?

John Keynes stated that markets are run by "animal spirits." He specifically applied this to stock exchanges. While "animal spirits" is in itself a judgmental term, it merits consideration because of how much economic decisions are obviously not rooted in rational self-interest.

And what is important more than that is understanding what actually drives economic decisions and knowing the extent to which psychology factors in people's economic choices.

Conclusion 

Unlike many others, I do not see capitalism as evil. But many claims of those who claim to speak for economic advancement are false. It is necessary to understand what actually drives consumption decisions, it is necessary to understand how any given practice affects the world, and it is necessary to remember the extent to which market owes to science, education and the government. With these understood and accounted for, economic activity can be done in a more intelligent manner. And that will benefit economic advancement as much as it will benefit clarity and fact.