Money Advice Guide

A strange phenomenon seems to be sweeping the western world. Economic rationalization and corporate greed are now paramount in the minds of governments and Chief Executive Officers (CEOs) everywhere. The almighty dollar has become king and everything else has been relegated to virtual pawn status.

All around us we see evidence of this:

• Governments are wasting taxpayers’ money on building tributes to their terms of office just to glorify themselves while cutting back harder and harder on essential services such as aged care and hospitals,
• CEOs are slashing company jobs at the “grass roots” levels thereby diminishing services to the public just to ramp up company share prices to exorbitant and unsustainable levels,
• Many businesses now are concerned only with payment and profit and have little regard for delivering proper and fairly priced goods and services,
• Everybody is encouraged to litigate even when claims are spurious and have nothing to do with negligence but everything to do with gross stupidity.

The combined effects of these practices ripple through the entire moral fibre of our society. In the end everybody has to pay more to receive less.

Three words sum up this phenomenon - “lack of responsibility.”

Former British Prime Minister, Winston Churchill, who led Britain through the dim and dark days of World War II, is credited with saying: “the price of greatness is responsibility.”

Where is all this lack of responsibility heading? If it continues on the course that it has over the last few years then I believe our societies are destined for moral bankruptcy.

Without responsibility there will be no greatness. There will only be brinkmanship and chicanery.

• Governments will continue to be voted out of office rather than into office as people search desperately for the lesser evil. This will ensure that politicians will falsely promise more and more to win your vote only to ignore you when they are elected to office,
• CEO’s will continue to walk away from the companies that they strip bare yet will still be legally entitled to retain multi-million dollar severance payments. This will be at the expense of dozens, hundreds and even thousands of jobs,
• There will be fewer businesses genuinely interested in delivering goods and performing their services in a caring and professional manner. This will cause them to spend ever increasing time and advertising money in the quest to attract “one time only” customers because they will be unable to retain “long term clients”,
• People will continue to pursue ridiculous compensation payments for outrageous claims that have little to do with common sense but much to do with falseness and irrational greed. This will ensure that insurance premiums will continue to explode to the point where it becomes so expensive that nobody will be able to afford it.

This malaise of greed has started at the very top and has filtered down all the way to the family unit level. It cannot go any further so it is up to individuals to stop the decay by refusing to accept trickery and greed as the norm.

Individuals must demand accountability, fairness, service and morality. In this regard they should voice their disgust every time they are confronted by turpitude. Having said that, you can only demand fairness and quality when you are prepared to deliver it yourself. To that end a study of self-esteem and personal development issues would not go astray.

Personal development courses and self-help books can improve the way people think.

Peter Daniels, an Australian personal development coach, has developed a body of work that would be difficult to surpass. I have attended many seminars presented by Mr Daniels. I have always found his spoken and written words to be morally and ethically inspiring. In my extensive library I also have a copy of most of his books. He has written many titles, including my personal favorite, “Miss Phillips, You Were
Wrong” (ISBN: 0-949330-26-4). It is the author’s account of how he refused to allow one of his early teachers (Miss Phillips) to set the standard for the rest of his life.

By ignoring the “sharp” practices of governments, companies, businesses and certain individuals what we are really doing is giving tacit approval to them. Like Peter Daniels, you don’t have to accept what is served up to you.

Write to your politicians. Tell them when they are not performing to a satisfactory standard. If they ignore your approaches, use your vote at the ballot box. Make sure you inform companies and businesses of their responsibilities if their standards drop to unacceptable levels. If they ignore you, stop buying their product and tell them so. Write letters to your local newspapers.

Wrongdoing can be corrected but it will only come through personal efforts. Similarly, sincere compliments, when deserved, can also make a positive impact. Individuals can make a difference. You can make a difference.

I am reminded of the story of the starfish. You may have heard of it but, if not, I will tell it: “A man and a woman were walking along a beach. The beach was strewn with starfish, which had been washed up on to the shore. There were hundreds of them, all in various stages of dying. The woman picked one up. Carefully she placed the creature back into the water. Her companion looked at her and said: “There are so many of them. Why bother? What difference will it possibly make?” The woman replied: “It will make a big difference to that one”.

One person can make a difference. When you lead by example, you can begin a crusade. Others may decide to follow. We can put an end to insidious practices. Moral bankruptcy will only occur if we allow it.

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Tags: corporate greed, economic rationalization, government, greed, money, motivation, psychology, self helpcorporate greed, economic rationalization, government, greed, money, motivation, psychology, self help

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“It is impossible to describe any human action if one does not refer to the meaning the actor sees in the stimulus as well as in the end his response is aiming at.” –Ludwig von Mises

Economics - to the great dismay of economists - is merely a branch of psychology. It deals with individual behaviour and with mass behaviour. Many of its practitioners sought to disguise its nature as a social science by applying complex mathematics where common sense and direct experimentation would have yielded far better results.

The outcome has been an embarrassing divorce between economic theory and its subjects.

The economic actor is assumed to be constantly engaged in the rational pursuit of self interest. This is not a realistic model - merely a useful approximation. According to this latter day - rational - version of the dismal science, people refrain from repeating their mistakes systematically. They seek to optimize their preferences. Altruism can be such a preference, as well.

Still, many people are non-rational or only nearly rational in certain situations. And the definition of “self-interest” as the pursuit of the fulfillment of preferences is a tautology.

The theory fails to predict important phenomena such as “strong reciprocity” - the propensity to “irrationally” sacrifice resources to reward forthcoming collaborators and punish free-riders. It even fails to account for simpler forms of apparent selflessness, such as reciprocal altruism (motivated by hopes of reciprocal benevolent treatment in the future).

Even the authoritative and mainstream 1995 “Handbook of Experimental Economics”, by John Hagel and Alvin Roth (eds.) admits that people do not behave in accordance with the predictions of basic economic theories, such as the standard theory of utility and the theory of general equilibrium. Irritatingly for economists, people change their preferences mysteriously and irrationally. This is called “preference reversals”.

Moreover, people’s preferences, as evidenced by their choices and decisions in carefully controlled experiments, are inconsistent. They tend to lose control of their actions or procrastinate because they place greater importance (i.e., greater “weight”) on the present and the near future than on the far future. This makes most people both irrational and unpredictable.

Either one cannot design an experiment to rigorously and validly test theorems and conjectures in economics - or something is very flawed with the intellectual pillars and models of this field.

Neo-classical economics has failed on several fronts simultaneously. This multiple failure led to despair and the re-examination of basic precepts and tenets.

Consider this sample of outstanding issues:

Unlike other economic actors and agents, governments are accorded a special status and receive special treatment in economic theory. Government is alternately cast as a saint, seeking to selflessly maximize social welfare - or as the villain, seeking to perpetuate and increase its power ruthlessly, as per public choice theories.

Both views are caricatures of reality. Governments indeed seek to perpetuate their clout and increase it - but they do so mostly in order to redistribute income and rarely for self-enrichment.

Economics also failed until recently to account for the role of innovation in growth and development. The discipline often ignored the specific nature of knowledge industries (where returns increase rather than diminish and network effects prevail). Thus, current economic thinking is woefully inadequate to deal with information monopolies (such as Microsoft), path dependence, and pervasive externalities.

Classic cost/benefit analyses fail to tackle very long term investment horizons (i.e., periods). Their underlying assumption - the opportunity cost of delayed consumption - fails when applied beyond the investor’s useful economic life expectancy. People care less about their grandchildren’s future than about their own. This is because predictions concerned with the far future are highly uncertain and investors refuse to base current decisions on fuzzy “what ifs”.

This is a problem because many current investments, such as the fight against global warming, are likely to yield results only decades hence. There is no effective method of cost/benefit analysis applicable to such time horizons.

How are consumer choices influenced by advertising and by pricing? No one seems to have a clear answer. Advertising is concerned with the dissemination of information. Yet it is also a signal sent to consumers that a certain product is useful and qualitative and that the advertiser’s stability, longevity, and profitability are secure. Advertising communicates a long term commitment to a winning product by a firm with deep pockets. This is why patrons react to the level of visual exposure to advertising - regardless of its content.

Humans may be too multi-dimensional and hyper-complex to be usefully captured by econometric models. These either lack predictive powers or lapse into logical fallacies, such as the “omitted variable bias” or “reverse causality”. The former is concerned with important variables unaccounted for - the latter with reciprocal causation, when every cause is also caused by its own effect.

These are symptoms of an all-pervasive malaise. Economists are simply not sure what precisely constitutes their subject matter. Is economics about the construction and testing of models in accordance with certain basic assumptions? Or should it revolve around the mining of data for emerging patterns, rules, and “laws”?

On the one hand, patterns based on limited - or, worse, non-recurrent - sets of data form a questionable foundation for any kind of “science”. On the other hand, models based on assumptions are also in doubt because they are bound to be replaced by new models with new, hopefully improved, assumptions.

One way around this apparent quagmire is to put human cognition (i.e., psychology) at the heart of economics. Assuming that being human is an immutable and knowable constant - it should be amenable to scientific treatment. “Prospect theory”, “bounded rationality theories”, and the study of “hindsight bias” as well as other cognitive deficiencies are the outcomes of this approach.

To qualify as science, economic theory must satisfy the following cumulative conditions:

All-inclusiveness (anamnetic) - It must encompass, integrate, and incorporate all the facts known about economic behaviour.

Coherence - It must be chronological, structured and causal. It must explain, for instance, why a certain economic policy leads to specific economic outcomes - and why.

Consistency - It must be self-consistent. Its sub-”units” cannot contradict one another or go against the grain of the main “theory”. It must also be consistent with the observed phenomena, both those related to economics and those pertaining to non-economic human behaviour. It must adequately cope with irrationality and cognitive deficits.

Logical compatibility - It must not violate the laws of its internal logic and the rules of logic “out there”, in the real world.

Insightfulness - It must cast the familiar in a new light, mine patterns and rules from big bodies of data (”data mining”). Its insights must be the inevitable conclusion of the logic, the language, and the evolution of the theory.

Aesthetic - Economic theory must be both plausible and “right”, beautiful (aesthetic), not cumbersome, not awkward, not discontinuous, smooth, and so on.

Parsimony - The theory must employ a minimum number of assumptions and entities to explain the maximum number of observed economic behaviours.

Explanatory Powers - It must explain the behaviour of economic actors, their decisions, and why economic events develop the way they do.

Predictive (prognostic) Powers - Economic theory must be able to predict future economic events and trends as well as the future behaviour of economic actors.

Prescriptive Powers - The theory must yield policy prescriptions, much like physics yields technology. Economists must develop “economic technology” - a set of tools, blueprints, rules of thumb, and mechanisms with the power to change the ” economic world”.

Imposing - It must be regarded by society as the preferable and guiding organizing principle in the economic sphere of human behaviour.

Elasticity - Economic theory must possess the intrinsic abilities to self organize, reorganize, give room to emerging order, accommodate new data comfortably, and avoid rigid reactions to attacks from within and from without.

Many current economic theories do not meet these cumulative criteria and are, thus, merely glorified narratives.

But meeting the above conditions is not enough. Scientific theories must also pass the crucial hurdles of testability, verifiability, refutability, falsifiability, and repeatability. Yet, many economists go as far as to argue that no experiments can be designed to test the statements of economic theories.

It is difficult - perhaps impossible - to test hypotheses in economics for four reasons.

Ethical - Experiments would have to involve human subjects, ignorant of the reasons for the experiments and their aims. Sometimes even the very existence of an experiment will have to remain a secret (as with double blind experiments). Some experiments may involve unpleasant experiences. This is ethically unacceptable.

Design Problems - The design of experiments in economics is awkward and difficult. Mistakes are often inevitable, however careful and meticulous the designer of the experiment is.

The Psychological Uncertainty Principle - The current mental state of a human subject can be (theoretically) fully known. But the passage of time and, sometimes, the experiment itself, influence the subject and alter his or her mental state - a problem known in economic literature as “time inconsistencies”. The very processes of measurement and observation influence the subject and change it.

Uniqueness - Experiments in economics, therefore, tend to be unique. They cannot be repeated even when the SAME subjects are involved, simply because no human subject remains the same for long. Repeating the experiments with other subjects casts in doubt the scientific value of the results.

The undergeneration of testable hypotheses - Economic theories do not generate a sufficient number of hypotheses, which can be subjected to scientific testing. This has to do with the fabulous (i.e., storytelling) nature of the discipline.

In a way, economics has an affinity with some private languages. It is a form of art and, as such, it is self-sufficient and self-contained. If certain structural, internal constraints and requirements are met - a statement in economics is deemed to be true even if it does not satisfy external (scientific) requirements. Thus, the standard theory of utility is considered valid in economics despite overwhelming empirical evidence to the contrary - simply because it is aesthetic and mathematically convenient.

So, what are economic “theories” good for?

Economic “theories” and narratives offer an organizing principle, a sense of order, predictability, and justice. They postulate an inexorable drive toward greater welfare and utility (i.e., the idea of progress). They render our chaotic world meaningful and make us feel part of a larger whole. Economics strives to answer the “why’s” and “how’s” of our daily life. It is dialogic and prescriptive (i.e., provides behavioural prescriptions). In certain ways, it is akin to religion.

In its catechism, the believer (let’s say, a politician) asks: “Why… (and here follows an economic problem or behaviour)”.

The economist answers:

“The situation is like this not because the world is whimsically cruel, irrational, and arbitrary - but because … (and here follows a causal explanation based on an economic model). If you were to do this or that the situation is bound to improve”.

The believer feels reassured by this explanation and by the explicit affirmation that there is hope providing he follows the prescriptions. His belief in the existence of linear order and justice administered by some supreme, transcendental principle is restored.

This sense of “law and order” is further enhanced when the theory yields predictions which come true, either because they are self-fulfilling or because some real “law”, or pattern, has emerged. Alas, this happens rarely. As “The Economist” notes gloomily, economists have the most disheartening record of failed predictions - and prescriptions.

About The Author

Sam Vaknin is the author of Malignant Self Love - Narcissism Revisited and After the Rain - How the West Lost the East. He is a columnist for Central Europe Review, PopMatters, and eBookWeb , a United Press International (UPI) Senior Business Correspondent, and the editor of mental health and Central East Europe categories in The Open Directory Bellaonline, and Suite101 .

Until recently, he served as the Economic Advisor to the Government of Macedonia.

Visit Sam’s Web site at http://samvak.tripod.com; palma@unet.com.mk

Tags: economic advisor, economic trends, economics, psychology, reference, theologyeconomic advisor, economic trends, economics, psychology, reference, theology

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