The Nature of Economics (2)


The Nature of Economics (2)
When a contract is incomplete as in the real world, the agents have discretion and face interdependence or a game situation. Each can influence the welfare of the other. Pursuit of self-interest in this situation is generally inefficient.
This discretion includes many commonplace behaviors such as providing wrong information, doing shoddy work, and working slowly. They will surely decrease the welfare of the partners such as employers, employees, and consumers.
The game situation can be described as the prisoner's dilemma game. It shows that pursuit of self-interest under contract incompleteness with discretion leads to inefficiency. For example, telling a lie is a strictly dominating strategy* in it but both players being honest is more efficient than both telling a lie.
The above story suggests that individualism or unrestrained pursuit of self-interest cannot be justified in general. It may be loosely justified only in organized markets, such as stock exchanges, financial futures exchanges, and commodity markets. Even these markets require a minimum of morality.
It should be noted however that only a few people are engaged in trading in organized markets. Even they are there less than 15% of the time they have in their life. Hence, individualism cannot be a proper moral stance or a philosophy for life that guides people in the world.
Individualism is a view that is justified by regarding all human relations as those in organized markets. They need to include human relations in families, schools, companies as well as those of friends and relatives. It is obvious that pursuit of self-interest does not lead to efficiency in these human relations in the real world.
Forms of efficient human relations are different among organized markets, other markets, companies, schools, and families. Yet neoclassical economics assumes that the form of human relations in organized markets prevails in the whole economy. How simplistic and how much biased its abstraction is!
Neoclassical economics has recommended many economic policies by assuming that all human relations are the same as those in organized markets. An example is casualization of labor markets, which virtually regards labor as physical parts. This shows that economic policies are recommended on the basis of a very simple paradigm. Most well-known economists lack a sense of balance because they have written papers by extremely simplifying reality. How harmful economics is!

*Suppose each player has two strategies, to be honest and to tell a lie. To tell a lie is a better strategy both when the other player is honest and when he tells a lie.

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