Knowing and Making

You may have heard this one before. At the end of an interesting BBC programme this evening ( The Foods That Make Billions ) a commentator suggested that the problem with modern capitalism is that it sustains itself by creating desires in consumers, instead of simply satisfying desires they already have. Is this true, and if so is it a bad thing? Certainly our preferences are not simple, static attributes, waiting in the back of our heads to be satisfied by the products we buy. Preferences - insofar as they even exist - are formed dynamically, influenced by biology, cognition, the environment and the social groups we are in. Would it be surprising if they were also influenced by people who sell products? To understand if that's a good thing, let's think through some of the things that happen in a consumer's mind. Not the rational consumer which generates stable continuous utility from consumption, but a real consumer with the cognitive patterns we see in actual people...

Karl at Modeled Behavior responds to Richard Posner (I am surprised to hear Posner emphasising psychology - I thought he was talking about Richard Thaler at first): I am not sure exactly what Posner means by psychology. I have never been optimistic about feelings as an economics model. Perhaps people spend more when they feel better but how do we get a consistent measure of feelings and even more to the point how does policy consistently effect them. What I do think makes a difference is expectations . Expectations do fit nicely into macroeconomic models because they bear a simple relationship to real events. Macro models mostly deal with visible events such as monetary transactions. And an expectation is just an event, translated in time and perhaps given a probability weighting. But we do model things in economics that are not that simple. The most obvious example: preferences . Preferences are very complex - just think of all the factors that impacted on your choice of what dinne...