Folk-Economic Beliefs

Abstract

The domain of ‘folk-economics’ consists in explicit beliefs about the economy held by laypeople, untrained in economics, about such topics as, for example, the causes of the wealth of nations, the benefits or drawbacks of markets and international trade, the effects of regulation, the origins of inequality, the connection between work and wages, the economic consequences of immigration, or the possible causes of unemployment. These beliefs are crucial in forming people’s political beliefs and in shaping their reception of different policies. Yet, they often conflict with elementary principles of economic theory and are often described as the consequences of ignorance, irrationality, or specific biases. As we will argue, these past perspectives fail to predict the particular contents of popular folk-economic beliefs and, as a result, there is no systematic study of the cognitive factors involved in their emergence and cultural success. Here we propose that the cultural success of particular beliefs about the economy is predictable if we consider the influence of specialized, largely automatic inference systems that evolved as adaptations 1 An earlier version of this chapter was originally published as Boyer, P., & Petersen, M. B. (2017). Folk-Economic Beliefs: An Evolutionary Cognitive Model. Behavioral and Brain Sciences, 41, 1–51. https://doi.org/10.1017/S0140525X17001960. Republished with permission from Cambridge University Press. 2 Acknowledgements: We are grateful to Nicolas Baumard, Martin Bisgaard, Timothy Blaine, Thom Scott-Phillips, Don Ross, Paul Rubin, and four anonymous reviewers for thoughtful and detailed comments on a previous version. © 2021 Michael Bang Petersen, CC BY 4.0 https://doi.org/10.11647/OBP.0257.09 160 Human Cultures through the Scientific Lens to ancestral human small-scale sociality. These systems, for which there is independent evidence, include free-rider detection, fairness-based partner choice, ownership intuitions, coalitional psychology, and more. Information about modern mass-market conditions activates these specific inference systems, resulting in particular intuitions, for example, that impersonal transactions are dangerous or that international trade is a zero-sum game. These intuitions in turn make specific policy proposals more likely than others to become intuitively compelling, and, as a consequence, exert a crucial influence on political choices. 1. The Domain of Folk-Economic Beliefs 1.1 What Folk-Economic Beliefs Are The term folk-economic beliefs denotes a large domain of explicit, widespread beliefs, to do with economic and policy issues, held by individuals without systematic training in economic theory. These beliefs include mental representations of economic topics as diverse as tariffs, rents, prices, unemployment, and welfare or immigration policies, as well as mental models of interactions between different economic processes, for example, inflation and unemployment. Our perspective on the origins and forms of folk-economics is based on two major assumptions. First, we argue that folk-notions of the economy should not be described solely in terms of deviations from normative economic theory. That has, unfortunately, been the common approach to the subject. Folk-views are generally described as the outcome of ‘biases,’ ‘fallacies,’ or straightforward ignorance. But describing how human cognition fails to work according to some norm of rationality tells us little about how it actually works. Second, we propose to make sense of folk-economic beliefs by considering the environment in which many, if not most, human cognitive mechanisms evolved. The study of folk-economic beliefs should be distinguished from other domains of investigation. Microeconomics addresses actual choices of agents in conditions of scarcity, independently of whatever mental representations trigger these behaviors in actual individuals, and also 161 5. How People Think about the Economy of the representations they may form of their behavior upon reflection. Another field, behavioral economics often uses experimental designs as a way to elucidate tacit motivations and capacities that direct economic choices in contexts where experimenters can manipulate incentives and information flow between agents (Plott, 1974). Finally, neuro-economics elucidates the brain systems involved in appraising utility and making economic decisions (Camerer et al., 2007; Loewenstein et al., 2008). The scope of a study of folk-economics is quite different from these three fields (see Figure 1 ). It focuses on people’s deliberate, explicit beliefs concerning economic facts and processes, for example, that foreign prosperity is good or bad for one’s own nation, that welfare programs are necessary or redundant, that minimal wages help or hurt the poor, and that rent controls make prices go down or up, and so forth. Fig. 1. A summary of the systems and representations involved in forming folkeconomic beliefs. External information about economic matters triggers activation of specific mental systems, which results in both economic behavior and explicit folk-economic beliefs. The latter’s effects on behavior cannot be assumed. Different fields, represented as clouds, focus on different parts of these processes. The model presented here is about the causal arrow linking specific mental systems to the occurrence of folkeconomic beliefs in people’s minds. (Figure by P Boyer. 2017) One should not assume that folk-economic beliefs (henceforth FEBs) have direct and coherent effects on actual economic behaviors. Many FEBs are about macroeconomic processes—for example, the level of unemployment, or the need for foreign trade, or the need for a nation to balance its budget—that are unrelated to people’s everyday transactions. 162 Human Cultures through the Scientific Lens Also, even FEBs that do bear on micro-economic realities, for example, on ‘fair’ prices or wages, may remain insulated from the psychological processes that drive actual economic behavior, as we explain below, which is why people may recommend specific policy outcomes and behave in ways that contradict that choice (Smith, 2007). Figure 1 summarizes the different domains of thought and behavior and the research programs involved. 1.2 Why Folk-Economic Beliefs (FEBs) Matter Understanding FEBs is of crucial importance, even if they do not govern people’s economic behavior, because they play a critical role in political choices. Perceptions of macro-economic developments influence how favorably people view the government and how they cast their votes (Nannestad & Paldam, 1994). The translation of inflation, unemployment, and income dynamics into political choices is mediated by people’s beliefs about the economy, for example, whether rising unemployment is affected by government policy (Peffley, 1984; Rudolph, 2003a, 2003b). Similarly, economic beliefs underpin people’s answers to such questions as: Is it a good idea to increase welfare benefits, impose tariffs on imports, cap rent increases, or institute minimum wages? Folkeconomic beliefs constitute a largely unexplored background against which most information about policy is acquired, processed, and communicated among nonprofessionals (Rubin, 2003). 1.3 A Different Approach to the Study of Folk-Economic Beliefs It is a matter of common knowledge that most people, including the educated public in modern democratic societies, do not think like economists (Smith, 2007, pp. 147–166). It is, for instance, a familiar finding that people are overinfluenced by consideration of sunk costs (Magalhães & Geoffrey White, 2016) or fail to consider opportunity costs (Hazlitt, 2010) in evaluating possible courses of action. More important for social and political debates, people often also express views on economic processes that seem misguided, if not downright fallacious, to most professional economists. There is a growing literature documenting this divergence (see, e.g., Blinder & Krueger, 2004; Caplan, 163 5. How People Think about the Economy 2006; Haferkamp et al., 2009; Hirshleifer, 2008; Rubin, 2003; Sowell, 2011; Wood, 2002; Worstall). However, there is still very little research on why such beliefs appear, and why they are so widespread. We argue that many folk-views on the economy are strongly influenced by the operation of non-conscious inference systems that were shaped by natural selection during our unique evolutionary history, to provide intuitive solutions to such recurrent adaptive problems as maintaining fairness in exchange, cultivating reiterated social interaction, building efficient and stable coalitions, or adjudicating issues of ownership, all within small-scale groups of foragers. The inference systems we describe further on are not specified as ad hoc explanations for folk-economic beliefs. All of these systems have been independently documented by evolutionary biologists, psychologists, and anthropologists who focus on such issues as the evolution of exchange and trade, its form in the small-scale societies in which humans evolved, and its consequences for psychological dispositions and preferences that can be observed in experimental studies on individuals in modern societies; for an overview, see Buss (2015). So, we are not proposing a new description or interpretation of the human evolved psychology of exchange, but rather, using prior findings to illuminate the emergence of folk-economic beliefs in modern contexts. 1.4 Models of Folk-Economic Beliefs Are Not Normative The model described here is emphatically not a normative proposal. That is, we do not intend to suggest that there is a right way to consider economic processes, and to evaluate folk-economic beliefs in terms of their validity or coherence. This deserves mention, for two reasons. First, as discussed below, most descriptions of these beliefs, in the literature, were originally motivated by the realization that people do not thin