Behavioral and Evolutionary Economics – NewsDay Zimbabwe
By Vince Musewe
IN my article last week, I shared insights on the economics of complexity and suggested that our economy has become a complex, adaptive and dynamic system, where it is inherently difficult to prescribe or predict outcomes and outcomes. responses to particular economic policy changes.
It is characterized by complex and unpredictable interactions between several networks (whether formal or informal, local or foreign) and these interactions are dynamic and constantly evolving with their own “emerging phenomena” to shape the macroeconomics. The economics of complexity challenges the basic orthodox assumptions of neoclassical economics and seeks to go beyond market transactions, static equilibrium analysis, and perfectly rational and interested individuals.
Various schools of economic thought outside of the neoclassical mainstream come under the term “heterodox economics”. This term is used to describe any innovative way of thinking about economics.
The Institute for Public Policy Research (IPPR) published an article entitled: “A new complex world: translating new economic thinking into public policies”. According to this article, there are three strands of heterodox economics namely: complexity economics (which I covered), evolutionary and behavioral economics. Each of them offers different perspectives on economic analysis seeking a more precise representation of the economy and in doing so opens up new possibilities for policy makers.
Evolutionary economics is defined as: “An economic system which involves endogenous change, a process of selection, continuous adaptation and multiplication. As a result of experience and adaptation, some economic strategies and decisions work and others fail. This process of continuous collection and adaptation of knowledge is driven by feedback mechanisms and interactions between economic actors and their environment.
This, for example, represents the current environment we have with our informal sector which is dynamic and constantly adapts to new ways of doing business in response to changes in economic policy. The informal sector is characterized by endogenous change through continual adaptation and innovation. Just visit places like Gazaland, Mbare Msika, Mpedzanhamo and the Glenview 7 complex, among many others, which for me remain underestimated and underestimated emerging economic poles, rich in innovation and adaptation, away from the so-called “formal economy” and policy makers. ‘ seen.
Evolutionary economics emphasizes the crucial role of history in shaping the future. Past interactions and decisions have major impacts on the economy – a characteristic known as path dependence – and any initial small change in an economy can produce drastic downstream effects, in part mediated by networks and a transversal hierarchical organization. Economic performance is determined not only by current conditions, but also by past decisions and initial conditions. Adaptation and innovation are at the heart of evolutionary economics.
What are the implications of evolutionary economics?
Policymakers must first seek to understand this phenomenon in order to design better and effective economic policies. Second, we simply need to encourage and invest more in innovation through, for example, provincial sector innovation hubs in key future strategic sectors such as manufacturing, agriculture, mining, education. , health, new technologies and ICT. These must be oriented towards added value outside of primary products. Innovation is at the heart of evolutionary economics. Indeed, innovation involves experimentation with new forms of physical technology, social technology and business techniques which, as history tells us, are the main drivers of increasing efficiency and productivity. , economic growth and wealth creation.
We also need to strengthen our patent rights, our quality standards and our competition rules to protect our innovative entrepreneurs. We need to encourage research funded by the private sector, especially in the use of new technologies, new breeds, new seeds, new processes, new products, etc. . In my opinion, we really need a “Center for Research and Innovation” (IRC) that aggressively promotes innovation and research across the country at the academic and industrial levels.
We then have behavioral economics as the third part of “heterodox economics”. The psychology of human beings is central to that of behavioral economists. In short, behavioral economics is a combination of psychology and economics that suggests that there are limits to human rationality in decision making.
Behavioral economists believe that policymakers exhibit what they call “limited rationality”, “limited self-interest” and “limited will”. Bounded rationality recognizes the limits that economic actors face when it comes to making decisions. Limited self-interest means that self-interest is usually limited by a sense of fairness. The limited will recognizes that economic actors sometimes find it difficult to make decisions that will benefit them in the long run.
“When making decisions, consumers save money. They use rules of thumb (heuristics) rather than putting together all the relevant information available (an impossible task anyway), they come to different conclusions depending on how a problem is posed to them, and they avoid making decisions that could lead to perceived losses. Recognizing the psychology of individuals in decision making leads to better political decisions. “
Policymakers cannot afford to ignore the psychology that prompts consumers to react in particular ways to particular economic issues that affect them. A very good example in the case of Zimbabwe is that of the US dollar exchange rate and the pricing of goods and services in the informal market.
Neoclassical economics assumes that consumers have unlimited rationality and behave in a uniform and predictable manner. Its economic analysis and modeling is therefore based on flawed assumptions and ignores the psychology that governs consumer behavior. Consumers and economic actors do not have the flawless ability to maximize benefits by weighing all the available alternatives presented to them. There are flaws and imperfections associated with their decision-making which neoclassical theory conveniently dismisses.
In order for us to maximize our potential in both human capital and resources, we need to think differently from the past. We must adapt to a new economic thought which recognizes a dynamic economy full of innovation and adaptation where the economic actors are not necessarily rational. This is the only way to build an inclusive and prosperous economy that is not dominated by a few.
In summary, the thought of complexity, evolution and behavior places a strong emphasis on dynamics, adaptation, psychology, imbalance and innovation. Modern economies are complex adaptive systems where change occurs endogenously, rather than as a result of exogenous shocks. Economies operate with constant fluctuations and multiple equilibria.
Policymakers, who operate within a neoclassical framework, will find it difficult to predict future trends when markets and economies do not return to equilibrium, when agents are not always rational, and when uncertainty is built into the market. system. A deeper understanding of the relationship between macroeconomic performance and individual decisions is therefore necessary for effective formulation of economic policy.
The message to leadership is therefore clear: Policy formulation that seeks to find effective solutions in a complex economic context can no longer be based on deductive analysis or top-down approaches, but must explore interaction and behavior using a bottom-up approach.
In my opinion, a clear example is that of our national budget compilation which must be a bottom-up approach from provincial economies to consolidation at the national level and not the other way around. This will certainly create better results and also ensure the inclusive economic development that we seek.