This podcast is an excellent discussion of some foundational questions in economics and human behavior, as explored in the work of Adam Smith. (The abstract below does not do the interview justice.)
Russ Roberts and Mike Munger on How Adam Smith Can Change Your Life
EconTalk host Russ Roberts is interviewed by long-time EconTalk guest Michael Munger about Russ's new book, How Adam Smith Can Change Your Life: An Unexpected Guide to Human Nature and Happiness. Topics discussed include how economists view human motivation and consumer behavior, the role of conscience and self-interest in acts of kindness, and the costs and benefits of judging others. The conversation closes with a discussion of how Smith can help us understand villains in movies.
See also:
Venn Diagram for Economics,
Behavioral economics,
The origins of behavioral economics: Kahneman interview,
The heterdoxy strikes back, and more on
Vernon Smith.
Roberts: ... this book in many ways is a psychology book intermingled with economics--The Theory of Moral Sentiments is in many ways a mixture of philosophy, psychology, and economics.
... I think modern economics has gone a little too far away from those lessons. ...
Munger: It is interesting that that theme comes up a fair amount among people that may be seen as heterodox by "true" economists. So, Friedrich Hayek often talks about scientism, the pretence of knowledge, how in the way that we model things we're making assumptions about information and structure that we don't have. But Smith's critique, and the way that you channel Smith's critique, is actually deeper, because it has to do with the nature of people and their motivations in choosing.
Roberts: ... The challenge here is that I push the idea that economics is an art and a craft, rather than a science. And it's easy to criticize economics the way I do and say: Oh, it's not scientific. People don't really maximize utility.
... Vernon Smith says this very well. I think he said it when I interviewed him and he said in lots of other places: 'Sure, people make mistakes all the time; sure, people aren't perfectly rational; so the "economic model" is silly and wrong. But in markets, markets discipline those decisions.' They teach people what works and doesn't work. They also punish bad decisions. They take away your money if you consistently make bad decisions. Markets provide you information to help you be wiser than you are on your own. So I think that's where I'd try to--that's the synthesis I'd like to think about. ...
Munger: So, I want to see your skepticism and raise you a little bit and see how far you'll go with this. When I teach class, I say homo economicus is a sociopath. No society composed of homo economicus could possibly survive.
Roberts: Yep. Munger: And the reason is, we would cheat on deals if we thought we could get away with them. So, what I want to advocate is actually--and this is a terrible thing to admit--is that Rousseau, Jean-Jacques Rousseau, was actually right about something: that the real way to understand the successful society is not to treat morals and the constraints that society puts on us as constraints, but as part of the objective function.
I too think people don't simply maximize consumption, but care deeply about being 'good' in the sense of benefiting some group (eg, co-ethnics, a religion), that is also perceived as good: it's tactics mated with strategy. Yet, those higher desires become irrelevant at the tactical level; when making a demand curve, it's kind of irrelevant, because regardless of your higher strategy, the tactics of minimizing cost per unit generate the same implications. So, in finance, I'm not seeing any way that a Christian or Buddhist investment strategy would be different than that for an atheist.
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