Predictions, Free Will and Economics

Can the future be predicted? When it comes to inanimate things, the answer is yes to a pretty large extent. How about the actions of human beings? Can those be predicted as well?

tIf the answer is yes, it implies that there is no such thing as free will. And if there is no free will, does it make sense to hold anybody accountable for any action? In a universe devoid of free will, how can you punish anybody for anything? After all, that guy whom you are punishing had no control over what he did. He was pre-programmed to do that act. Unless, of course, you too are pre-programmed to punish him for his pre-programmed action. Things are getting very twisted!

Then there’s the fallout of predictability on God. Most religions describe God as both omniscient (having unlimited knowledge) and omnipotent (having infinite power). Being omniscient, God knows the future. And being omnipotent, God can change the future. But being omniscient, God would have known that He would change the future at a later date. And would have incorporated that change of the future into His knowledge of the future! Which means that God can’t really change the future. God can be either omniscient or omnipotent. He can’t be both.

Despite all the inherent problems and outright errors in predicting the future, neoclassical economics does goes ahead and predicts human actions. It assumes that people are rational. By definition, rational actors will be coherent, won’t exhibit contradictions and can evaluate all options and do what maximizes their economic interests. That does sound reasonable: after all, who doesn’t act to maximize their interests? According to neoclassical economics, people act rationally and hence predictably.

But if that were indeed true, nobody would over pay or under charge for anything. We would never have bull runs and bear markets. That is so obviously not true. So why did economists still build models and predictions based on such an obviously wrong assumption? Call me cynical but I think they had no other option. How else could they build a subject that was not left to the whims and fancies of random acts of people? And if there was no subject, what would they teach? Besides, a subject that is similar to the physical sciences in terms of predictability commands more “respect”. Like being eligible for a Nobel prize…

Well, ok, maybe I’m too harsh. But you see the problem in those rationality based models? Thankfully, in more recent times, one set of economists have accepted the problem with models based on rational beings and come up with the idea of behavioural economics and added insights from the psychology of human behaviour into the economic sphere.

And while we’re on the topic of behavioural economics, do read “Predictably Irrational” by Dan Ariely. Superbly written book that shows how we behave in ways that are anything but rational.

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