Obsolete Economics: From Widgets to Digits

Labor + Capital + Raw Materials = Finished Goods

I spent four years learning economics at Stanford.

I’ve spent (going on) the last forty years unlearning it.

It’s not that Stanford failed me.

It turns out that the entire field of modern economics was built upon not one but two outmoded ideas, if not “conceptual” San Andreas faults.

It’s All Software Now

Fundamental flaw #1 was economists’ presumption that people were utility-maximizing, rational actors.

Unh-unh.

As demonstrated by psychologists like Daniel Kahneman and Amos Tversky (in the latter case, literally across the Stanford quad from the Econ dept.), people are nothing of the sort.

They’re frequently irrational, unpredictable actors who contradict themselves and behave inconsistently all the time (OK, maybe not engineers).

See, “Flushing Two Centuries of Economic Theory, or, Never Mind About Human Rationality.”

Forget “Marginal Cost”

Which leads to misconception #2:  the nature of capitalism’s traditional “building blocks”:  capital, labor, and raw materials.

That model made sense in a manufacturing world whose sole output consisted of (material) widgets.

But, it simply doesn’t apply to a technology and service-driven economy.

To pick just one example, what is the marginal cost of today’s quintessential product, software (essentially, computer code)?

Answer:  zero, because it can be reproduced infinitely, for free.

Embattled Labor, Blurred Capital

Similarly, in a world where machines and robots are destined to produce our goods, drive our vehicles, and likely even operate on our bodies, what exactly is “Labor” — or at least, the human kind?

Gradually if not suddenly, its role would seem to shrink to the point of disappearance.

Which means the sole, supporting leg of capitalism’s 3-legged stool is capital.

But, exactly what is “capital?”

Is it the same as money?

If so, new currencies like Bitcoin threaten to explode classical economics’ accepted definition — not to mention loosen monetary authorities’ (read, government) control over the spigot.

21st Century Economics

None of this is to suggest that academe — and society — would be better off not studying economics.

On the contrary, what’s needed is see to the subject with continuously fresh eyes, and to be ready to cast off models and ideas that no longer fit, the way a snake sloughs its skin.

P.S.:  Thomas Kuhn coined the term “paradigm shift” to describe this phenomenon.

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