Economic Thinking
post by limerott · 2019-07-16T17:33:54.648Z · LW · GW · 12 commentsThis is a link post for https://limerott.com/economic-thinking/
Contents
Finite thinking Infinite thinking Economics None 12 comments
Economics is often portrayed as a dismal science. It seems to be about a small group of experts talking mostly about monetary policy. I want to argue that this is not true and that there is an elegant, natural and simple interpretation that admits far-reaching applications.
Finite thinking
First, we introduce finite thinking. Finite thinking is a kind of thinking that takes into account that resources are finite, or more generally, that entities in the real world have to obey the constraints of the real world.
When you are thinking about how to spend the $10 in your wallet, you carefully weigh different options against each other. You are performing finite thinking. But if you know that you are carrying around plenty of money, you no longer think of it as a scarce resource and, thus, no longer think finitely.
This applies to time management as well. If you have plenty of time, you cease to think of time as finite and tend to slack off. But if there are only two hours left until the deadline, you start to think finitely and try to use the remaining time as wisely as possible.
A more subtle example is this: When a thief robs a bank and escapes, the police could throw their hands in the air and say that he must have already left the country. Or, they acknowledge that the speed of his vehicle is not infinite and that he must be somewhere within a certain radius around the bank.
Economical thinking is nothing other than finite thinking: Anyone and anything that interacts with reality is subject to certain constraints. To think economically means to factor in these constraints.
Infinite thinking
It is instructive to look at its counterpart, which is infinite thinking. Here, it is implicitly assumed that a resource is available in an infinite amount. At first, this seems abstruse and not how people think at all because it clearly defies the basic truths of reality. But in fact, this mode of thinking is commonplace and pervades all aspects of life. It can also be very useful.
When buying groceries, most people do not take a close look at the price nor do they sum up the total amount in their heads. They pick the products they planned to buy and then pay the cashier the amount that is asked of them. Even though they are not aware of it, they implicitly assume that they have an infinite amount of money. However, if the resulting total is exorbitantly high, finite thinking kicks in and people start looking closer.
A wonderful example of infinite thinking is the efficient market hypothesis. It states that stock price immediately reflects all publicly available knowledge about a company. Even though it has the words "efficient" and "market" in it and is clearly about economics, it has nothing to do with economical thinking. For it to be true, every trader must have access to all relevant information at all times, react instantaneously to changes and make decisions completely rationally. To acknowledge that this can't be true is to apply finite thinking. This opens the door to a more precise model of the stock market, that, for example, takes into account basic human instincts.
Which other areas are prone to infinite thinking although finite thinking would be more appropriate?
For the most part of human history, we have seen air as an infinite resource. A forager did not quantify the carbon dioxide that his bonfire emitted into the air, neither did the industrialist when burning coal. The more advanced our technology becomes, the more we impact we have on the environment and the greater the pressure to switch from infinite thinking to finite thinking. This mental shift happened in cities such as industrial London, which suffered from air pollution. On a global scale, we have seen this happening when the ozone layer was threatened by CFCs.
Telling a young person that they have all the time in the world is essentially an encouragement to think infinitely. If they took this advice to heart, which they rarely do, they would end up postponing major life decisions or pursuing unrealistic plans. A much better strategy is to accept time as a finite resource and make the best of it.
In any given moment, we can only pay attention to a small range of phenomena. It is impossible for us to simultaneously observe everything that is happening around us. You cannot play on your smartphone and watch traffic at the same time. People who claim to be good multi-taskers often think of their attention as infinite.
We sometimes tend to treat other human beings as though they had an infinite amount of self-control, knowledge and wisdom. This is how children commonly view their parents. It is obviously not the case, but it is much easier to see them as perfect beings rather than to deal with their flaws and deficiencies.
Consider books. We can easily acknowledge that we only have a finite amount of time. But we often ignore the logical conclusion -- that we can only read a finite number of books. This leads to long ever-increasing reading lists that we believe "we will get to eventually". But once you realize that you have to be selective about the books you read, you start thinking economically. You make a list of absolute must-read books, start to prioritize important books over unimportant ones and you pay more attention to what books get recommended often.
Conspiracy theorists are particularly guilty of infinite thinking. To establish a secret world order, you would need an infinitely good coordination structure, infinitely strong-willed individuals and an infinitely clear plan that everybody adheres to without question. Positing an unrealistic structure like this is way more convenient than to recognize the complexities of modern societies.
In health care, the idea that a human life is invaluable is widespread. If a human life is at risk, any amount of money, risk and effort seems to be justified to save it. And this is a sentiment that health professionals in direct contact with patients undoubtedly should have. But from a planning perspective, it is irreconcilable with reality. And worse: if you adopted this mindset, you could actively cause harm by making decisions that don't prevent as much suffering as they could.
A politician who understands that the size of the front page of a newspaper -- and thus, public attention -- is limited, can enact unpopular legislation in the shadow of a major newsworthy event. In constrast, a politician who thinks infinitely implicitly believes in a supernatural force that makes every citizen in his country instantly aware of his legislation. Unlike his colleague, he is not going to see this opportunity [1].
In lightning chess, players have only a few seconds for their next move. Since this implies a limited number of possible thoughts, you can assume that your opponent won't (and can't!) play an overly complicated strategy.
If finite thinking is better in so many cases, why do we have infinite thinking at all? It is a mechanism to abstract away details to see the bigger picture. Without it, we would have to take into account all real constraints at all times, which would quickly overwhelm us. So, infinite thinking itself is the product of the limitations of human computational power. It is indispensable for us and it is so common that we are not even aware of it. However, you should not overdo it either. The key is to view the world at the level of abstraction that is suitable for the particular application.
Economics
So far, we have focused on different kinds of thinking. What does this have to do with economics?
Economics and its concepts arise when you think finitely about something. You ask yourself: What happens if you take into account the fact that a system has to obey the constraints of reality? The dynamics that arise as a consequence are the economics of that system.
In the public eye, drug cartels tend to be viewed as ideal constraint-free entities that exist outside the laws of reality. But people who actively fight them know better: They see them as ordinary organizations with mundane elements such as a hierarchical order of command, management of resources, establishment of trade routes, a distribution network for the end product -- all while they have to follow the laws of supply and demand. All of these aspects make them vulnerable and make them seem less almighty.
We tend to think of the law system as an impeccable ideal that transcends the rules of the real world. We believe that when a new law is introduced, it immediately changes how people interact. We also believe that it automatically enforces itself at all times since "It is THE LAW!".
When you spell it out like this, it seems ludicrous, but these are implicit assumptions we make all the time -- unless we focus our attention on the law itself.
The reality is far less spectacular. The main reason the law works is because there is a general consensus that you should abide by the law. If we did not have that, anarchy would break loose and law enforcement would be futile. Also, the law is only enforced because there are flesh and blood people who enforce it. This leads to an economics of law enforcement: There is only a finite number of police officers who drive finitely fast cars. As a consequence, if there is too much crime, a choice has to be made where to enforce the law and where not.
There is an important practical ramification: If you think infinitely about the law, you will think that cutting spending for police will not influence the degree to which the law is upheld. This can result in a significantly higher response time and staff shortages. If spending is cut too much, it may be that your own house is being burgled, but nobody is there to help you.
The standard interpretation of economics is the study of the best allocation of finite resources. This is compatible with our interpretation. The main difference is that we don't define it through actors and goods in an external reality, but through different modes of thinking. This allows for an understanding of economics that is universally applicable since it can cover anything you can think about.
We need to think in ideals to navigate the world. But when these ideals touch reality, they are subjected to its constraints. Then, economics is born.
This can arguably be a good thing. ↩︎
12 comments
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comment by Slider · 2019-07-17T01:59:44.404Z · LW(p) · GW(p)
Taking into account that happenings must conform to laws of physics is not economics but physics. The finiteness being a constraint doesn't mean that all constraints lead to finity. If the intention is to introduce a farter reaching conception of economics this seem like it is in danger of being too general.
I think post-scarcity economics should it be feasible would fall under the purfew of economics while it seems its outside of finitism. Just because physics was at one point dominated by newtonian mechanics doesn't mean that to be physics means to be newtonian. "To think like physics is to think like clockwork" would be blatantly untrue under quantum mechanics.
In the grocery example it's simultanoeusly true that you have a finite life and that you have finite money. Walshing throguth the shop might be time efficient. This forms a less of a strawman position. If you have a measure that is not the current bottleneck it doesn't make sense to optimise it but instead you focus on the bottleneck and other things become important mainly how they couple to the bottleneck. If you are in a good paying job that leaves you with little free time, saving some dollars on your groceries can be a destructive distraction. It's not that there is an assumption of infinity althought that perspective might be an interesting rhetorical hyberbole.
I could also see that when we are legislating if we give too much of weight what can be enforced we migth come up with something that is practical but where the vision for what kind of society we are building gets hazy. If a monarch and constituion conflict should the police follow the monarch or the consitution? If we give an answer someth8ing akin to "which ever option is most implementable in our situation" that is politically a total copout move.
If economist have something to say in the domain of other experts usually it doesn't overshadow in importance the opinion of domain experts. If you are tyirng to do phsyics with economics your models are going to be needlessly comp0licated and you are likely to get things either wrong or be less exact. Sure a kind of conception where exicted atoms try to "sell" photons into space is not obviously doomed, but it's not going to score high on heuristics like occams razor. (althought now that I start thinking about what kind of frankenstein theory it would be there seem to find somewhat natural analogies, temperature might be analogous to a price level where individual actors still do transactions/scatterings but they average out)
Theories work well within their domains. Within their domains their assumtions hold. Where their assumtions don''t hold the theory tends to be less useful. Finiteness isn't always relevant or the deciding factor and choosing to give such a framework much weight might mean that you miss out on understanding factors that are more pressing.
Replies from: limerott↑ comment by limerott · 2019-07-17T19:13:17.498Z · LW(p) · GW(p)
With regard to physics: You say at the end of your post that theories should stay inside their domain. I agree. But decision making and analysis of markets are not in the domain of physics, but economics.
Post-scarcity is an illusion. Even if we reach a very high level of development, there will still be scare resources left to distribute, such as time.
Maybe my post was unclear about it, but I am in favor of the time-efficient method of groceries shopping (provided one has enough income). It is definitely the better solution here, as you already pointed out. Thinking finitely about your time will lead you to the conclusion that you should think infinitely about (i.e. without considering prices) which groceries to buy.
While thinking about your comment, I understood that it's useful to distinguish between implicit and explicit assumptions of infinity. In the first case, you simply ignore the prices and, thus, implicitly treat your wallet as infinite. In the second case, you would explicitly assume that you have an infinite amount of money, which would naturally change your decisions into buying as many valuable and durable goods as possible. With "thinking infinitely" I mean the first case.
I would definitely enjoy reading more about your frankenstein theory.
I think that you need to match the right tool to the right context. I've observed that in some contextes, the right tool would be finite thinking, but people tend to apply infinite thinking instead. For example, if you have a model of the world in which the law enforces itself automatically, you will be less likely to endorse policies that increase spending on police. That is a mistake.
I appreciate you taking the time to share your thoughts.
Replies from: Slider↑ comment by Slider · 2019-07-18T00:23:51.780Z · LW(p) · GW(p)
The opening statement of the post is about how economics is seen to be a very niche area. In discussing that the area of applicability should be broader is a discussion where the theory should apply where the audience expects it would not. I have the trouble that the provided perspective is fuzzy where I don't know what kind of claims it makes in a environment that is not its "home turf".
In the case of speedy shopping in my mind the comparison is between "700 money + 3h" and "720 money + 2h". In this kind of analysis no infinities occur. There is no explicit infinity. At points it seems that "infinite thinking" in the context of this post just means "non-finite thinking" that is it's a negative characterisation what it is not and not what it is. The claim is not clear enough / explicit enough that it could stand apart from interpretation into particular situations. I could for example claim that making a decision to careful look at the prices makes an infinite thinking assumption about my available time. If one set of thinking can be plausiblly characterised as on one hand as infinite or finite it makes me question what the concept even means.
It's not clear to me that post-scarcity is an illusion. We currently live in a oxygen abudant world and the whole worry would be that the world would be scarse in regards to that. It might be true that the world can not easily be gegotten rid of scarse elements. But whether scarcity is a dominant or main subject of attention is another question entirely. There are such idioms such as "selling sand to saharans" or "selling snow to eskimos" which point to very simple / folk conceptions of situations where market activity doesn't make sense. Eskimos still use snow to construct buildings so its useful and there is literally a finite amount of it but it is not scarce by a long shot.
Time is pretty solid but I am not convinced that it's inescapeable as a scarse resource. If I do something manually I might be limited mainly how often I can repeat it the situation being very time based. But if I program a program to do it for me time usage is in a very different pattern where the main limiter is whether i have the skill and reliablity to develop the neccesary code to do the job. In a world filled with programmable robot servants execution times might be neglible and not realy worth worrying over and I can proceeed at the speed of my thought making mental health the frontier. Thus there is a hypothetical world where time is not a scarse resource
Economics is tricky for me becuase it kind of "soft", it doesn't lend itself easy to adversial reading. Contrast for example how Noether's theorem provides a deep result with implications. From the previous understnading that nature preserves some special quantities such as momentum or time the theorem provides how any differentiable symmetry implies the existence of a conserved charge. But in physics speak "differentiable", "symmetry" and "conservation" have well defined technical meanings and there is little to no extra-techinal meaing to the result. In a frankensteinian fashion I might have a strategy where if there is a symmetry between sell-price and buy-price I could try to noether a charge out of that fact. But the existence of the symmetry in the first place is very approximate or subject to many assumptions. In areas where I am comfortable those would be "guesses" or "promising directions" but not "results"
Replies from: limerott↑ comment by limerott · 2019-07-19T03:32:41.051Z · LW(p) · GW(p)
To explain where I am coming from: My primary goal was to make sense of a somewhat fragmented field by developing my own philosophy behind it and turning it into concepts that I can use as thinking tools to better understand the world. My goal is not to make academic progress in that field, but to extract the viewpoint it (in my opinion) offers and use it for my own purposes.
In particular, I noticed that we are prone to treat finite (and even scarce) resources as infinite, such as making overly long book lists that would take 2-3 lifetimes to complete reading. This is non-sense of course and developing a sensibility for this bias (?) can have personal utility. I can imagine plenty of scenarios where this may be helpful, such as a boss overburden his workers with work, ignoring the fact that his workers' energy is scarce.
Regarding the groceries shopping scenario: The mere fact that you did the analysis, i.e. used deliberate thinking to come up with options and weigh them against each other, implies some degree of finite thinking. Infinite thinking does not refer to explicit assumptions of infinity in your thinking, but rather to the fact that (to put it crudely) no thinking was done at all.
Finite and infinite thinking don't have to be binary categories. Continuing with the groceries shopping example, consider three agents A, B and C. A is on vacation and does not care about neither time nor price, thus entering the first available shop that satisfies his needs. B is only concerned with price, so he drives to a supermarket that is far away (but offers the most competitive prices). C considers both price and money and decides that the time saved is worth the increase in price. You could formalize this as: What are the parameters of the utility function that I am currently considering? (For C, the utility function u(a,b,c) would be a function of "does the shop contain what I need?", "what is the expected price?", "how long will it take me?"). This would make it part of decision theory.
You are right in saying that, technically, what I mean by "infinite thinking" is really "not finite-thinking", but as you may agree, the first term sounds a lot more catchy. It's a trade-off that hopefully is not too obstructive.
You touched on the difference between finite and scarce with the Eskimos example. I want to note that what I mean by "switching from infinite to finite thinking" is equivalent to "treating a resource that is factually finite as being scarce". So, you could say that "finite thinking" is really "scarce thinking".
Concerning your hypothetical world, you already acknowledge that, in this case, mental resources (speed of thought, concentration, energy) become the bottleneck and thus the scarce resources to be allocated. I don't think that we will ever attain a state in which we can completely abolish scarcity. When "real" economists talk about post-scarcity, they mean an abundance of elementary goods and services so that people don't have to fight over water and food. If you take it by the letter, the only post-(formal scarcity) scenario I can imagine is us becoming floating bubbles of consciousness in space, eternally content and peaceful. But that would not be any fun.
I think that math, in its essence, is easy. If it weren't for our faulty thinking apparatus, we would see that immediately. But the problem is that a lot of things that matter can only be accessed through vague notions without a technical definition at its heart.
Replies from: Slider↑ comment by Slider · 2019-07-19T15:36:03.396Z · LW(p) · GW(p)
I might be a little harsh on the details as I percieve economics having a needlessly ideological component. I might also be reacting because I percieve this line of thinking to be potentially dangerous and I don't like that I can't formulate the link between the starting steps and the danger.
Game of Thrones SPOILERS
After the conflict in Westeroos in the meeting of important people Sam suggests that they should do democracy. People do not argue that it would be a bad idea but laugh it off. The feudal way of life is so ingrained in the world that other ways of life are unthinkable.
END OF SPOILERS
In the same way I think in the real world there are parties that try to get people to entrench scarse mindset as a natural way how things are and use propagandist means to do so. Fossil resource energy companies might try to hinder the invention of cleaner forms of energy or make their adoption later so that their business sector lasts longer. They have a vested interest in keeping people minds that energy scarcity is at the current level and not be too inquisitive about how it might change in the future.
In the robot ubiquitus scenario I don't think the scarse resources that are lest are elementary resources so that would fit the bill of a postscarcity scenario. "Even if we reach a very high level of development, there will still be scare resources left to distribute, such as time." presents time as an example of a resource whose scarcity is unassailable and the robot scenario assails that. Retreating to a position where any individual resource need not be scarce in all worlds is a motte-and-bailey and I would feel would that be challenged the goal posts would keep on moving. This speaks to the manner in which the original belief was held which is unlikely to weight literal technical truth that much. And my experience has been that I do not have to fight over water in the part of the world I am in. There are also microenviroments such as families where food is not scarse to children, there is no children buying food from their parents. There are other factors (parents might not want to have a fat kid and might deny food requests based on that goal) but those are not usually approached from an economy theory standpoint. To my understanding economists should be interested in those but I understand that as their tools assume scarcity they like applying their tools where they work (and as families might compete for food to share between them they focus on that bit). But just because you have a hammer doesn't mean that the world is made out of nails.
Thus I would be interested to UNDERSTAND why getting rid of scarcity might be hard, but having an opinion that it is so is not of that much great interest to me. It might be fine if it is too complex to unravel in short conversation. But my experience has been that it's not a matter of making things understandble enough but that I am not indoctrinated enough, that such discussion grinds to a halt because of believability/interestingness of the assumptions needed to be made. A religious person migth show how their belief system leads to great fun acts of compassion but if they ask me to copy their belief system because of these attractive properties there is going be a problem about existence of certain metaphysical actors. And if someone would claim that if I am compassionate I must have implicitly assumed the existence of god I would be highly skeptical. Uncritical copying would run the risk of corrupting my thinking outside of the field of compassion. In certain sense adopting economics as a wide dominant thought force could make me assume everybody is a psychopath and that families should be impossible.
Replies from: limerott, Pattern↑ comment by limerott · 2019-07-20T19:16:39.589Z · LW(p) · GW(p)
I feel that we are getting off-topic and I also think that I don't follow some of your thoughts.
The danger that you refer to may be laissez-faire capitalism and its effects on governments, societies and the environment. But this has nothing to do with the original post.
I think that you may be throwing out the baby with the bathwater. The fact that there are problems with the current implementation of economics (aka globalization, multi-national cooperations, inequality etc.) does not preclude economic ideas, or ideas inspired by economics, having merit.
If you interpret scarcity as scarcity of basic resources, then the robot agent scenario does fit the post-scarcity idea. But to get there, we need technological advancement and higher productivity. And for that, economic thinking may be useful.
I have never suggested to adopt the whole field of economics as one's dominant way of thinking. I am strictly against taking ideas, from any field, at face value without critical thinking.
Replies from: Slider↑ comment by Slider · 2019-07-20T23:23:11.595Z · LW(p) · GW(p)
If you would only use the concept of epicycles in a particular theory of gravitation then the relevance of epicycles would seem to be tied to the relevance of that gravitational theory.
If somebody says that they believe in god I am tempted to lump them into the category of a religiouos nut. Similarly there are economic concepts which seem to be part of a coherent/connected memecomplex and I get a memetic allergy reaction or strong expecation what those other things would be. One of the properties of this memecomplex is that it can tell a plausible story for long time before places to to doubt it are apparent. Atleast religion makes claims in metaphysical language where you can recognise the claims as wild, but economical ideology dresses itself as very tame. I might be wrong to generalise this to big populations and I would love to see the subject-field be treated without shady epistemology and I think careful concept analysis is likely to provided that. But I think it's hard mode and it can easily become resistant to scrutiny.
↑ comment by Pattern · 2019-07-20T04:26:44.087Z · LW(p) · GW(p)
In the same way I think in the real world there are parties that try to get people to entrench scarse mindset as a natural way how things are and use propagandist means to do so. Fossil resource energy companies might try to hinder the invention of cleaner forms of energy or make their adoption later so that their business sector lasts longer. They have a vested interest in keeping people minds that energy scarcity is at the current level and not be too inquisitive about how it might change in the future.
This is a good model of scarcity (as a way of thinking) - in which something is not viewed as a constraint to be eliminated, but as inescapable/unchangeable.
In certain sense adopting economics as a wide dominant thought force could make me assume everybody is a psychopath and that families should be impossible.
Evo-psych might be more useful here. If this economic frame makes bad predictions concerning measurable testable things (like the literal prisoner's dilemma, which there might be real world data on) concerning how people actually work then either the model is missing something* or it's not very predictive in that domain**.
*Altruism, a desire to appear altruistic, if your family is related to you then "genetic" fitness isn't just served by pursuing your own wellbeing, perhaps having friends/not "being a psychopath" is "rational", etc.
**If it describes the behavior of companies, then it is a useful tool to have. Especially if it tells you how to avoid being screwed over.
comment by Pattern · 2019-07-16T23:37:47.474Z · LW(p) · GW(p)
Conspiracy theorists are particularly guilty of infinite thinking. To establish a secret world order, you would need an infinitely good coordination structure, infinitely strong-willed individuals and an infinitely clear plan that everybody adheres to without question. Positing an unrealistic structure like this is way more convenient than to recognize the complexities of modern societies.
Infinity is a bit of an exaggeration here.
We need to think in ideals to navigate the world. But when these ideals touch reality, they are subjected to its constraints. Then, economics is born.
A good point.
I look forward to your future posts, and I enjoyed this one.
Replies from: limerottcomment by Viliam · 2019-07-16T19:37:36.926Z · LW(p) · GW(p)
I agree with most of the text, however...
For [efficient market hypothesis] to be true, every trader must have access to all relevant information at all times, react instantaneously to changes and make decisions completely rationally.
...this is unnecessarily strong assumption. It is only sufficient that for every publicly traded thing there are enough traders (with enough money) who act upon the supposedly perfect information.
If the market price is balanced, a random person won't throw it out of balance by selling a few pieces incredibly cheaply (or buying a few pieces incredibly expensively). The wiser players will buy (or sell) the few pieces, and the original price will be soon restored.
Replies from: limerott↑ comment by limerott · 2019-07-16T20:28:38.270Z · LW(p) · GW(p)
I agree that once a price has reached equilibrium, it is likely to stay there if the number of traders is large enough. But stability does not imply objectivity. It may be that this equilibrium is an overestimation, as often happens with technological hypes.
There is also no objective value of a stock that would allow us to separate traders into wise and unwise. Every trader is a human with certain experience, skills, investment strategy, available information, cognitive biases that he is unaware of. And the stock value merely represents the sum of all traders' characteristics.