The temple of the invisible hand

If you haven’t taken many economics courses, you may be under the impression that economics is all about money. It’s true that money (in the form of prices, incomes, etc.) is easy to measure and appears a lot in economic discussions, but it is not the main point of economics. Economics is about decision-making and well-being.

Of course, humans being what they are, it is pretty difficult to fully understand “decision-making.” Classically, economists simplified this quest by assuming that people are rational creatures acting in ways that maximize their utility, or happiness. This idea, of course, doesn’t always hold, and the field of behavioral economics was developed to fill this gap in understanding human nature.

I cannot help feeling indignant when I hear somebody say, “Well, of course that’s wrong. If humans were rational, no one would bother being nice to others, without expecting something in return.” The last part of that statement is true, but not in the way that the speaker intended. It is true that the rational person economists envision wouldn’t do a favor without benefitting from it, but economists are generally very open-minded about what “benefit” means. Since economists try not to discriminate between different preferences, a “benefit” could in theory be virtually anything a person values. For example, the most stereotypical “Homo Economicus” might be willing to help someone out in exchange for money. A more subtle type might help someone with the understanding that the favor might be returned at a later time. However, there are also more generous reasons for a person to render a service. For example, they might value the other person’s gratitude itself, they might directly draw pleasure from an increase in the other person’s well-being, or they might feel a warm glow after doing their part for humanity. Thus, the rationality assumption is not as restrictive as it first appears. It basically says that people do their best to be happy, given the set of choices available to them.

So despite being fairly reasonable people, economists are misunderstood. It is possible to imagine that some of these economists may have exiled themselves from society, to some remote place where they could perhaps contemplate questions such as “What is the image of the shadow cast by the invisible hand?” We may call these, for lack of a better word, the economonastics. If you met one, you might have a conversation like the following:

“Oh, wise economonastic, what do you think of waiting in line in the dining halls?”

“It is terrible! Beware the lines, for they create deadweight loss.”

“What is deadweight loss?”

“It is a waste. It is benefit that nobody gets.”

“What would you have us do?”

“Make it socially acceptable to have people hold each other’s places in line.”

“But wouldn’t that be unfair to the person left holding the spot?”

“Young one, you could make it mutually beneficial by grabbing a glass of water, or a less-popular dish, and then letting the person who held your spot do the same.”

Of course, this is a bit of a simplification. It assumes that time spent in line is wasted, and that arranging spot-holders is costless. But the point is that there can be many mutually beneficial arrangements not taken advantage of because of dining hall social norms.

Another example of this is the long line that sometimes occurs right before class time in the dish disposal section, which is a deadweight loss’s paradise. It occurred to me the other day that in some cases it would be mutually beneficial for a person in line to take the plates of the person in front of them, stack them on theirs, and deposit them, as it would save time for both individuals. If social norms changed, many people could be made a little better off.

You might discuss with these economists the most important question on every college student’s mind:

“How much sleep should I get, wise one?”

“Ah, what an excellent question. That question I cannot answer, at least not directly. I can, however, tell you some things to consider.”

“I would like that very much.”

“Well, you basically have to try to do a cost-benefit analysis. First of all ask yourself, ‘Does it feel good to sleep more?’ or, conversely, ‘Does it feel bad to sleep less?’ How much value do you place on these feelings? Next, ask yourself, ‘How does an additional unit of sleep affect my ability to do work?’ ’How much does my health change per unit of sleep and how much do I value that?’ and ‘How much is productive time today worth compared to productive time tomorrow?’”

“But those are difficult questions!”

“They are indeed. And the net benefits will probably change. The costs are almost certainly smaller when you’ve slept a lot, and larger when you’ve slept very little. With this in mind, you want to make an educated guess, and sleep at the point where the benefits of sleeping one extra minute or other small unit of time (we call this the marginal benefit), matches the costs of doing so. Then, you will experience optimization, and there is nothing better.”

And with some parting words, you would travel back home, and you would be a changed person.