My wife is reading Kahneman’s “Thinking Fast and Slow”, somewhere in which he relates his reaction when he first came across the bedrock of mainstream economics: rational microeconomic behavior. I must admit I had a very similar reaction. The description of human behavior that underpins modern economics is so bizarre that my first thought was that it must be some form of Monty Pythonesque satire. Surely, I thought, this is a joke and in a few pages all will be revealed. But no. Economics really is built on a foundation that to outside eyes is not just odd, but what appears to be a deliberate spoof.
What is even more strange, and those of you who listen to economists and take them seriously please suspend your sense of humor at this point, is that this total perversion of humanity is then taken as the essential starting point for all subsequent theorizing. Economists are all brought up nowadays to repeat the mantra that all “good” theorizing about the economy at higher levels — what economists call macroeconomic theory — has to be based on a foundation of theorizing at a lower level — what economists call microeconomics. So in the literature and in conversation it is common to come across the phrase that some higher level idea is based upon “micro foundations”.
Except that foundation is exactly what Kahneman and others laugh at.
You would too if you spent any time at all thinking about it.
Which brings me to another point: economics is full of these oddities that anyone outside the profession would dismiss a priori as some form of ludicrous joke....
One consequence of economics being packed full of all this self-satirical nonsense is that it has great difficulty in explaining real world situations. The entire body of thought of economics includes useful tidbits that anyone can pick up and play with because they are common-sensical. But when we rely on economics to explain big important questions it begins to stutter and creak under the weight of all that absurdity.
Which is why it fails to explain long term, or what I call tectonic, shifts.…
So, in the spirit of helping you frame your own thoughts about growth, and to help you ponder the tectonic shifts underway down beneath the froth of the surface phenomena of economics, here is the diagram I keep in front of me to remind where to look for problems and solutions. It is not a theory, it is a framework:The Radford Free Press
Tectonics and Growth