Knowing and Making

There's lots of Bryan Caplan I don't agree with, but I can't deny he has some interesting ideas and a good way of thinking about them. The connection between growth and ideas is not so much logical as psychological. It is not logical for people to embrace counter-productive ideas just because conditions are getting worse, but they seem to do it anyway. This is from a paper on idea traps which is the concept that a society can get stuck in a sub-optimal equilibrium where the economic ideas that it runs on are flawed, but do not self-correct. My own experience of this is a paradox based in the economic situation in the UK right now. Logically, when there is low demand in an economy companies with a fixed cost base should spend more on sales and marketing. (This might not apply to firms which can easily scale down their costs - you can argue that the marginal return on sales spending is lower and therefore the optimal spend is less. But most companies are retaining most of th...

I’ve been thinking more about fiscal salesmanship – the concept that people will not just spend their fiscal stimulus – it has to be structured or presented in a certain way. I asked myself, as an entrepreneur, what would I do if I wanted to change the behaviour of a large group of people? I would do some marketing. People don’t just respond to pure incentives. Of course incentives do make some difference; when a consumer decides what to spend in the shops today, one of the factors will be that most products are 2% cheaper. But it’s only one of many influences, and people simply don’t have enough processing power to automatically incorporate all available incentives in their decision-making process. Indeed, financial incentives can usually be overridden or even inverted by the right kind of sales or marketing effort. BMW salespeople don’t cut their prices because of the signal it might send about their quality. Ryanair makes people think it is the cheapest airline by the clever ploy of...