Why the ”black box” way of economist to look at the world is completely unrealistic.

I’ve recently started reading ”The Undercover Economist” by Tim Harford, and as I’m writing this I must admit that I’ve only read about a fourth of the book. And my objections are not as much to what Harford is saying as, to the fact the way economist think – as portrayed by Harford.

The premises that he lays down is that economists believe in a free and unregulated market because a free and unregulated market always strives for balance and will ultimately always achieve it. And a balanced market is the best for all parties. And although I may agree to this in principle, the question remains – does the theory hold water in practice? Does a market always strive for a situation where no party can gain more without another party loosing out? Given enough time, I guess, the market will regulate itself from any incident, but as the latest economic crisis has shown it takes a terrible toll to start to tip the scale back once it is headed for free fall.

Harford does indeed discuss this problem and offers solutions from the economist community to this problem. But with my high-school computer teacher’s words still ringing in my ears that economy is the science of money-making, I find that the methodology that economist use is deeply flawed.

The methodology used by economist, as described by Harford, is very similar to the black box method used by physicists. You take an object and put it in a black box – i.e. a theoretical container that contains nothing. Then you add one or a number of variables and calculate how the object is affected. And while these calculations are accurate in the specific scenario they are far from accurate in real life, because real life is full of a bunch of unknowns. Meteorology works much the same way, you program a bunch of patterns into super-computers, add a bunch of elements and out comes a forecast that is accurate 70% of the time.

Unfortunately, the way Harford was describing economics it sounded very much like the black box methodology without the super-computers. The methodology works for analyzing events after they happen but are inaccurate when making predictions. Too many unknowns…

One of these unknowns that I think economist tend to ignore is a basic human driving force (if not THE basic human driving force) – greed. Of course, it would sort of be a conflict of interest for economist (the scientist of money making who are supposed to give advice to greedy people on how to make money) to take it into their calculations, but I maintain that it is one of the main driving forces of any form of market system. The private sector is oriented towards making financial profit. And what is the definition of greed? To want more (money or otherwise).

And similarly to those who thirst for power, those that are greedy are not prepared to share their earnings with others. Thus they will destroy anyone or anything that is in their way. So you have a situation where greed is running the show. And with a globalized economy that means that if greedy people are allowed to run the show, they can actually tip the scale so deep to one end that it falls over completely leaving a world in ruins.

And ultimately, that is why the completely free and unregulated market theory doesn’t work. Because the most basic element that influences all variables in the black box has not been taken into consideration. Add human behavior and greed into the calculations and you may just be able to make accurate forecasts…