Thursday, July 18, 2013

Is There a Cognitive Turn in Economics?

I take the phrase "cognitive turn in economics" from a short post by Peter Boettke, Hayek and Behavioral Economics. Boettke's implication seems to be that there is a movement in economics away from deductive reasoning from the apriori observation that man acts and towards an economics that considers why man acts when he conducts (monetary?) transactions with others.

To the degree such a movement is occurring, it is a confused movement if it thinks it is doing economics. I suspect that there is room for a science that studies the why of man's actions, when he conducts transactions with others, but this isn't economics, it is a subset of psychology.

Thus, to observe the growth of this science and consider it a "turn" in economics, simply because it is labeled "behavioral economics," is a great error. There is no "turn" in economics, behavioral economics is just a poorly worded identifier for the science that tries to understand the reasons behind man's actions, when those concerns transaction between men, rather than considering what are the logical implications of the actions themselves.

Ludwig von Mises made this distinction clear at the start of Human Action, when he discussed the nature of praxeology, of which economics is a subset:
Human action is purposeful behavior. Or we may say: Action is will put into operation and transformed into an agency, is aiming at ends and goals, is the ego's meaningful response to stimuli and to the conditions of its environment, is a person's conscious adjustment to the state of the universe that determines his life[...]The field of our science is human action, not the psychological [p. 12] events which result in an action. It is precisely this which distinguishes the general theory of human action, praxeology, from psychology.
Thus, for example, a behavioral economic observation that people  act emotionally and will buy more when a sales sign is placed on a product, does not fall under the spectrum of praxeology.

Mises went even further in anticipation of behavioral economics and discussed why its emphasis on instinctual actions is not economics:
 He who acts under an emotional impulse also acts. What distinguishes an emotional action from other actions is the valuation of input and output. Emotions disarrange valuations. Inflamed with passion, man sees the goal as more desirable and the price he has to pay for it as less burdensome than he would in cool deliberation. Men have never doubted that even in the state of emotion means and ends are pondered and that it is possible to influence the outcome of this deliberation by rendering more costly the yielding to the passionate impulse.
That said, students of the psychological science, behavioral economics, may have something of a big head as to what their science has accomplished to date. As best I can tell, what they have done is classify various psychological techniques that are already known to many, rather than discovering new psychological techniques. In other words, it's one thing to classify a horse and buggy, an automobile and airplane as modes of transportation, It is another to conceive of the idea of an airplane actually build and actually build an airplane.

Behavioral economics doesn't seem to have built anything. They have categorized psychological techniques that are used by others. A retailer, for example, may have never heard of behavioral economics but he sure as hell knows that you put impulse items near checkout, that you reduce the price, of say, milk as a loss leader and you offer coupons. All these techniques may be categorized by behavioral economic scientists, but that is what they are doing and not much else.


  1. I'm glad you re-posted a link to this write up.

    I've been personally struggling with the concept of understanding how economic action based purely on deductive reasoning...which seems to be the major point of Austrian economics, should interact with empirical reasoning. I know the two are generally treated separately, but that seems ridiculous to me.

    It seems unreasonable to suggest that we should be committed wholly to one or the other.

    In terms of human action, I can tell you that when my job responsibility was solely in a sales capacity before becoming a business owner, that I used psychology day in and out to overcome rational objections on economic decisions(sales) from my customers.(don't read that as "ripping them off")

    On that basis I agree 100% that behavioral economics should be a separate science.

    Quantifying it would be extremely difficult, studying it in some ways...not so much.

    There are an uncountable number of legitimate books on the skill of human persuasion as it relates to sales....which is a major driver of economic activity.

  2. "Economics can only tell us that a boom engendered by credit expansion will not last. It cannot tell us after what amount of credit expansion the slump will start or when this event will occur. All that economists and other people say about these quantitative and calendar problems partakes of neither economics nor any other science. What they say in the attempt to anticipate future events makes use of specific "understanding," the same method which is practiced by everybody in all dealings with his fellow man. Specific "understanding" has the same logical character as that which characterizes all anticipation's of future events in human affairs: anticipation's concerning the course of Russia's foreign policy, religious and racial conditions in India or Algeria, ladies' fashions in 1960, the political divisions in the U.S. Senate in 1970; and even such anticipation's as the future marital relations between Mr. X and his wife, or the success in life of a boy who has just celebrated his tenth birthday. There are people who assert that psychology may provide some help in such prognostications. However that may be, it is not our task to examine this problem. We have merely to establish the fact that forecasts about the course of economic affairs cannot be considered scientific."
    -Ludwig von Mises

  3. You must not have read and/or understood the works of Vernon Smith, Ernst Fehr, Samuel Bowles, Colin Camerer, etc. or you would not say that experimental and behavioral economics haven't built anything! There have been many adjustments in our understanding of when and under what circumstances certain equilibria come about when games are played with members of the only relevant population: humans. And much more is to come.