by The limited real-world usefulness of economics Whole Foods is providing the world with a very interesting economics lesson. Immediately after Amazon bought the upscale grocery store chain, it cut prices substantially for many items on the shelves. As a result, sales have boomed by around 25 percent. Was the price cut a good move? Actually, the real lesson might be how little economics has to say … Interestingly, economics doesn’t shed much light on this issue. In the models students learn in their undergraduate courses, companies don’t make mistakes — they simply act in their own rational interest to maximize profits. Any temporary errors get smoothed out in the long run, as bad managers and inefficient companies are weeded out of the market. But this is
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The limited real-world usefulness of economics
Whole Foods is providing the world with a very interesting economics lesson. Immediately after Amazon bought the upscale grocery store chain, it cut prices substantially for many items on the shelves. As a result, sales have boomed by around 25 percent.
Was the price cut a good move? Actually, the real lesson might be how little economics has to say …
Interestingly, economics doesn’t shed much light on this issue. In the models students learn in their undergraduate courses, companies don’t make mistakes — they simply act in their own rational interest to maximize profits. Any temporary errors get smoothed out in the long run, as bad managers and inefficient companies are weeded out of the market.
But this is more of a hopeful assumption than a hard scientific fact. A quick glance at the simplest economic model shows how unrealistic it is to expect industries and markets to adjust smoothly and perfectly …
So introductory economics, with its blithe optimistic long-run focus, has little to teach future corporate managers. Advanced economics has more complicated math, but also tends to assume that corporate decisions are all optimal …
So why is economics such a perennially popular major for the up-and-coming white-collar business class? It gives kids a general faith in free markets and a bit of practice using math to solve problems. It teaches them how to think about government policy like minimum wages or fiscal stimulus. But it doesn’t actually teach much about the real workings of business …
So while the economics major is now riding high, this is subject to change. If the aspiring business class gets tired of being told that markets will work out just fine, and starts wanting to learn how to actually make markets work, there could eventually be an exodus into more business-themed majors.
So perhaps the lesson of Amazon and Whole Foods is about the limited real-world usefulness of economics itself.
What Noah says here only confirms what I have been arguing for years now – mainstream neoclassical economics is in the story-telling business.
Mainstream neoclassical economics has since long given up on the real world and contents itself with proving things about thought up worlds. Empirical evidence only plays a minor role in economic theory, where models largely function as a substitute for empirical evidence. The manifest failure of its theoretical pretences, the one-sided, almost religious, insistence on axiomatic-deductivist modelling as the only scientific activity worthy of pursuing in economics, are all testimonies of its inability to become a science that gives birth to new, interesting, relevant, and informative knowledge.
In the end, it all boils down to the fact that we all know that most activities, relations, processes and events in society are genuinely uncertain. The data do not unequivocally single out one decision as the only ‘rational’ one. Neither the economist, nor the deciding individual, can fully pre-specify how people will decide when facing uncertainties and ambiguities that are ontological facts of the way the world works.