The root cause of our hopelessly defective economic theories is a fundamentally misguided model of human behavior. Modern economic theory assesses the impact of policies by replacing all human beings with homo economicus, which is a brain connected to a mouth and stomach. Because the heart and soul of human beings is removed from the picture before the economist begins his calculations, economists are routinely baffled by behavioral economics, based on actual behavior instead of hypothesis. Topping this deep ignorance is an amazing arrogance about “microeconomic foundations” — that even if macro is wrong, at least our micro theories rest on solid foundations! Such assertions leave me speechless; what can you say to someone who confidently claims to be Napoleon Bonaparte ?
Because of complete failure to understand human beings, economists subscribe to a ridiculous theory of human welfare — it is monotonic in consumption. All of us act as if our sole purpose in life is to maximize the utility obtained from consumption. Economists have never heard of the Buddha who taught that the root of suffering is attachment to material pleasures obtained from consumption. Yet the illusion that increasing consumption leads to increasing welfare has been clearly exposed by Easterlin. Economists continue to struggle to counter and explain away the Easterlin Paradox, since it contradicts their firm belief in the “Coca-Cola theory of happiness”. This is briefly described below, in an excerpt from my previous post on “The Search for Knowledge” :
The second idea that we must unlearn is the “Coca-Cola theory of happiness”, which is at the heart of modern economics. If a cool and refreshing drink makes a hot and thirsty man very happy, he should not deduce that he has stumbled upon the formula for a lifetime of happiness. It would be very foolish of him to build a hot sauna next to a refrigerator stocked with cases of cola, and market it as the ultimate pleasure machine. The economists’ idea that the purpose of our lives is maximization of the utility of lifetime consumption is equally foolish. Consumption and acquisition of material goods provide short run happiness but have zero correlation with long-term happiness. Long run happiness depends not on consumption, but rather on cultivation of character traits like gratitude, contentment, and compassion, as well as cultivation of social relationships – loving, and being loved.
Heterodox economists are attempting to find a technical fix to the problems of modern economic theory. In my view, we cannot launch a revolution by changing the equations we use. The changes required are much deeper — we need to change the way we understand human beings. We need to understand that “Revealed Preference” is a disastrous mistake — by avoiding thinking about the unobservable preferences in our hearts, and replacing them by observable behaviors, we prefer a shallow understanding to a deep understanding. The choice may be guided by feelings/emotions which are inherently unobservable, but we can learn about them by looking into our own hearts, since we are human beings. By ruling out introspection, and asking human beings why they do what they do, we rule out the possibility of understanding human behavior. Economists are religiously committed methodologically to “rational” behavior. They will not consider models of human behavior which allow humans to be whimsical or emotional. Even the alternative models, like Prospect Theory, which are being constructed, endow human beings with computational and informational capacities they do not possess. This blocks the possibility of knowledge. Unless we re-introduce the heart and soul into human beings, we will continue to fail to understand human behavior in any of the realms of economics, politics and society.