"Those who apply themselves too closely to little things often become incapable of great things." Francois de La Rochefoucauld

Saturday, July 18, 2009

Natural Economic Behavior

"Never follow the crowd." - Bernard Baruch



If our behavior guides economics, and our behavior is guided by natural inherent tendencies, then, wouldn't it make sense to study nature and organisms to best underpin economic theory? "What Went Wrong With Economics," is the headline of a recent article in The Economist. What went wrong? Well part of it is the assumption that we have a complete knowledge. The second thing that went wrong is ignorance of behavior. The third thing that went wrong is lack of understanding history.

Complete knowledge doesn't exist in anything. Anyone that speaks with the pedantry of complete knowledge is severely blind to this reality. We don't know what we don't know. Every generation since written record has held assumptions as to having complete knowledge and understanding of many factors of existence. Science especially is a perfect example of how this assumption has always been wrong. And what is economics? At best an evolving science. At worst speculative guesswork.

The easiest way to see that bubbles in economy will probably always exist is to consider the most minute fundamental fractal of economy. In a capitalist system every movement in commerce stems from 'exploiting a profit.' Now, by exploiting i mean simply engaging in a transaction that will yield profit. That is all business is. Everyone one of us lives from this. Every act of profit will be replicated by almost any witness. This initiates a cascade of participants to engage in the same act. By this fact a widget that is being bought to hold for profit (say a stock) will ultimately be bought up to extremely high prices. Its a very natural process all individuals seek to profit. So the problem in economics is simply the fact vast number of economic participants can't self reflect and see this.

History chronicles tulip bubbles, stock bubbles, currency bubbles, gold bubbles, art bubbles, etc. Its almost like seasons. They are a reflection of human behavior. The fact that winter withers away much plant life is not bad; it is a natural cycle. It would seem foolish to us to wish to have a season of harvest perpetually. As it would seem foolish to wish to stay awake without having to rest or sleep. Economy accelerates and de-accelerates perpetually as well.

The lessons we learn is to harvest and build prudently, not exuberantly. To acknowledge length of cycles and bubbles. To save and to cultivate. To build value within ourselves and our businesses. To be adaptive. And, above all to learn from history, seek to understand, and be intellectually humble.

3 comments:

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