So Economics Isn't Enough, Huh?
The latest trend for making economics more "scientific" is to incorporate results from other disciplines, such as psychology and neuroscience. Now as an Austrian economist, I welcome just about any criticism of the neoclassical mainstream. However, some of the proponents of the newfangled ways often overstep when they criticize "flaws" with basic economic principles.
For example, consider a recent CNN article that deals with "dread" and procrastination, and why we supposedly need something more than orthodox economics to appreciate the issues. Here's an excerpt:
Standard economic theory says that people should postpone bad outcomes for as long as possible, because something might happen in the interim to improve the outlook.
In real life the "just get it over with" reaction is more likely, said Berns, a professor of psychiatry and behavioral sciences. He offers a personal example: He usually pays credit card bills as soon as they arrive instead of waiting until they're due, even though "it doesn't make any sense economically."
Now this outcome isn't counterintuitive, irrational, or anything else, and I don't need to use neuroscience to make the point. There is a positive probability that I might miss the due date — due to a car accident, postal worker strike, extended illness, abduction by aliens, or just plain forgetfulness. Every day I postpone payment, the probability that I will be assessed a ridiculously high late fee increases. On the other hand, what is the benefit? Buying a 15-day bond?
For most people, the money used to pay a monthly credit card bill is sitting in a fractional reserve checking account, and that's why paying your credit card bills right away makes perfect sense. On the other hand, "standard economic theory" would suggest that huge financial institutions don't pay their bills early "just to get it over with," and it would also suggest that people wouldn't rush to bring in their library books (because of low or no fines). Guess what? Standard economic theory is perfectly correct in these "predictions."
In other words, the mere information that you're about to feel pain "seems to be a source of misery," George Lowenstein, a specialist in economics and psychology at Carnegie Mellon University, wrote in an accompanying review of the work.
Did we need MRIs to tell us this? While you're explaining the mysteries of the universe, Dr. Lowenstein, perhaps you can help me out with this one: There's this kid in my neighborhood who mows lawns in exchange for green pieces of paper. Now why the heck would he do that? It's almost as if the expectation of future spending seems to be a source of present happiness. Isn't that amazing? Perhaps I'll apply for a federal grant to get to the bottom of this ubiquitous phenomenon that stumps mainstream economists.
My sarcasm aside, the point should be clear: Economists have known for a long time that expected future pleasures and pains yield currently experienced pleasures and pains. Indeed, without such phenomena, human action wouldn't occur at all — i.e., the actor is always acting now in order to remove future uneasiness. Bohm-Bawerk devoted some space to this very fact in his treatise on capital and interest, which he wrote way back in the 19th century.
Mainstream economic models certainly do make ridiculous assumptions concerning "rational" behavior, and much of the experimental and behavioral economics literature is useful in pointing out these flaws. However, mainstream economic models are not synonymous with orthodox economic principles. We should avoid the temptation to think today's professors in the white lab coats know far more about economics than the "old school" thinkers. Especially when it comes to basic economics, there is rarely anything new under the sun.