Folk economics.

• Author: Rubin, Paul H.

Common sense theories are people's ordinary understandings of certain bounded bodies of information, such as the set of ideas that nonscientists hold about celestial phenomena (folk astronomy).

--from Handbook of Child Psychology, vol. 2, Cognition, Perception, and Language, excerpt by Wellman and Gelman (1998, p. 524)

[M]an's instincts ... were not made for the kinds of surroundings, and for the numbers, in which he now lives. They were adapted to life in the small roving bands or troops in which the human race and its immediate ancestors evolved during the few million years while the biological constitution of homo sapiens was being formed.

--from The Fatal Conceit, by Hayek (1988, p. 11)

1. Introduction

   Although psychologists have studied "folk psychology," "folk physics," and "folk biology," among others, there has been less attention paid to "folk economics"--that is, the economic notions that naive (untrained) individuals have and the perceptions of such individuals about the economy.' There are some studies that do discuss learning of economic principles; a major compendium is Lunt and Fumham (1996). From the research reported there and elsewhere, it is possible to derive the principles of folk economics, although the authors do not do so. The key point is this: folk economics is the economics of wealth allocation, not production. Naive people or those untrained in economics think of prices as allocating wealth but not as influencing allocation of resources or production of goods and services. In folk economics, the amount of a good traded--whether in aggregate or by each individual--is fixed and independent of price. Moreover, each individual is concerned with the distribution of wealth and income (with particular but not exclusive attention to his/her own wealth), not with any efficiency gains from economic activity. The world of folk economics is a zero-sum world, and the primary economic problem for each individual is to maximize his or her own wealth in this world. One of the goods traded is labor, so the number of jobs is also viewed as fixed. Thus, in folk economics, if one person gets a job someone else must lose a job.

   I do not want to imply that people cannot learn about positive-sum interactions or about efficiency. Those of us who teach economics make our livings by exactly this form of teaching. Caplan (2001) has shown that more educated people in general think more like economists, and of course we economists ourselves have learned to do so. But the point is that it must be learned; it is not an innate piece of knowledge. Speech is innate; all humans in normal environments learn to speak. Reading must be taught; it is not innate. Economics is more like reading than like speech. Psychologists are becoming increasingly comfortable with the notion that certain patterns of understanding are innate, that is, hardwired (Barkow, Cosmides, and Tooby 1992; Pinker 1997, 2002; Buss 1999). There is a good bit of evidence that we are hardwired to be vesy good at protecting our own interests and at detecting cheating in an exchange situation (Cosmides and Tooby 1992). But being able to look out for our own interests is not the same as being able to detect social gains from exchange, and this is what is lacking in folk economics.

   In the next section I present some evidence about the nature of folk economics. I then provide an evolutionary explanation. The following two sections present some implications, first analytic implications and then implications for economists in doing economics. The final section is a summary.

2. Evidence

   The evidence for the zero-sum hypothesis is indirect. (2) However, there are several sources of such evidence. I cite three sorts of evidence: evidence from learning of economics, evidence from surveys of economists and others; and evidence from others who have examined similar issues.

   Learning Economics

   The first and most important piece of evidence for the zero-sum hypothesis is from the psychological literature studying learning of economics, as summarized in Lunt and Furnham (1996). Most of this book consists of articles by psychologists, not economists. (3) Most deal with the understanding of experimental subjects (often children) of prices and what the authors discuss as economics. But in none of the chapters is there any reference to prices or incomes serving any sort of function in directing production, or any sort of efficient allocation function. Rather, every reference discusses prices as serving to direct resources toward or away from a particular individual, but with no reference to efficiency. This might mean that the subjects of the studies did not understand the efficiency implications of prices. It may also mean that the authors of the studies, trained as psychologists but not as economists, did not fully understand the role of prices. If psychologists who specialize in studying learning of e conomics do not understand the role of prices in achieving efficiency or directing resources, then this is itself evidence that folk economics does not include such an understanding. It is interesting that the index to the book contains no entry for efficiency or productivity, or for anything like gains from trade.

   Much of the discussion of economics deals with what might better be called home economics--the analysis of consumption behavior (e.g., Pliner et al. 1996). Here the goal is to be a wise consumer--to obtain the best value for oneself in the marketplace. Dickinson and Emler (1996) discuss children's learning about wealth distribution. (4) They argue that explanations for the distribution of wealth are "ideological" (p. 49). They indicate that "adolescents and adults explained wage differentials predominantly in terms of individual effort: how hard people worked, how much they had studied, how many qualifications they had obtained, how important they were to society" (p. 50). They indicate that capitalist arguments for inequality are "that large differentials are the natural outcome of market forces and serve as incentives for achievement" (p. 50). Additionally, "... adults were more likely than adolescents to provide explanations for wage differentials in terms of economic and political criteria such as market forces, social values and trade union pressure, though such explanations are still less common in adulthood than individual equity-type explanations" (p. 65).

   Nowhere in the chapter is there any mention of allocation based on productivity or any indication of productivity differentials. There is no discussion of wages directing labor toward higher valued occupations or of some individuals being more productive in some jobs than other individuals. The flavor is one of an existing array of jobs, some paying more than others, and individuals competing for these jobs--but no discussion of why the array exists or of the benefits of differential wages. Indeed, the phrasing of the issue itself--why are there wealth inequalities?--is an example of zero-sum thinking; an economist would begin by asking what determines wages and then perhaps ask why they are unequal. Similar analyses are in Dittmar (1996) and Leiser and Ganin (1996).

   Surveys

   A second source of evidence is analysis of responses by economists and others to various survey questions. The best source is the Survey of Americans and Economists on the Economy (SAEE). (5) Blendon et al. (1997) and Caplan (2001, 2002) have analyzed these results. The questions deal with specific policy issues and so cannot be directly used to measure differences in underlying models of the economy. But the major difference between economists and others is that "the public is much more pessimistic than economists" (Caplan 2002, p. 439) and "economists are systematically more optimistic about the past, present, and future of the economy than other people are" (Caplan 2002, p. 441). This is quite consistent with a world in which economists understand the possibility of productivity increases and economic growth but the public has an intuitive zero-sum mentality. Neither Blendon et al. nor Caplan suggests this explanation, but it is consistent with both analyses and with Caplan's argument that noneconomists si mply are incorrect about many issues. Blendon et al. also provide several hypotheses to explain this difference, but they do not allow for a fundamental difference in economic understanding. Interestingly, the only question in which economists indicate more concern than the general public is with respect to rate of productivity growth; economists are significantly more likely to name this as a problem than the public. This is, of course, consistent with a world in which the public does not focus on growth. However, economists sometimes commit the same sort of zero-sum error: "If the rich get more, that leaves less for everyone else" (Krugman 2002, p. 67).

   Other Authorities

   Steven Pinker (2002, p. 221) makes an argument similar to that made here. He argues that there is an "intuitive economics" associated with "reciprocal exchange, in which one party confers a benefit on another and is entitled to an equivalent benefit in return," an exchange that is zero-sum in goods (but not in utility). He also points out that people show no intuitive understanding of "modem physics, cosmology, genetics, evolution, neuroscience, embryology, economics, and mathematics" and that there is no way that the mind could have evolved specific modules or tools to understand these domains. While economics is only a small part of the material covered in this book, and while Pinker does not discuss economics in the level of detail that I use, his analysis is quite consistent with mine, although they were developed independently.

   This analysis of divergence between economists and others is not new. Newcomb (1893), although not relying on data, suggests that there is a fundamental difference between what he calls "popular political economy"...