Random Thoughts: Economics and Human Action

“Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities”~John Maynard Keynes

Introduction

Since the advent of John Maynard Keynes’ economic system, economists are constantly expanding Keynes’s system. Governments are using more and more statistical analysis for the development of public policy. Subsequently, Economists are available to correlate how government policies allegedly are helping the economy. In turn, elected officials can provide reports, for example, on how favorable GDP metrics are demonstrating economic growth. How do these items correlate to the individual citizen?

What is Economics?

Economics:  A science that is highly misunderstood by many. Many presume that it is a study about money. Or, they believe it is a study about investing in the stock market. While money is something that is analyzed inside the body of knowledge of economics, it is not the only subject matter in economics. In a typical entry level economics course, the student is introduced to graphs, charts and diagrams. These items are utilized to help the user understand economics, but are they the basis of economic thought? While stats, math, and calculus are valuable tools used by economic scientists, these tools do not provide the foundations of economic thought. Here is a definition of economic thought: Economics is the study of humans managing scarce resources with alternative uses. Since this is the case, Economics is a human behavioral science. On average, Economists do not venture into the notion of why someone makes the decision, they simply explain outcome of the decision. The rationale of the human action is left up to a different branch of behavioral science.(e.g. Psychology, Philosophy, Sociology, and the like)

If economics is about humans managing scarce resources, and those resources have alternative uses, how do these resources become scarce? What is scarcity?  What are the alternative uses? The foundation of these questions not only are addressed in the field of economics, but also in the studies of philosophy.

Human Action

As previously mentioned, the average person presumes Economics is simply dealing in matters of money—using math, graphs, and a large amount of technical jargon. While math is used in Economics, it is an attempt to quantify what happened and project what could happen; this forward thinking speculation is rooted on what has happened. However, at the core, this is not needed to make economic analysis, albeit it is useful. It is not needed to gain an above average understanding of economics. What is needed to be made clear: Economics is rooted in human action. Diagrams and complex calculus are simply means to attempt to explain human action. The axioms of human behavior are not derived from math, as they are derived from logical a priori reasoning. It is worth repeating: Math is vital in helping to understand what happened, with regards to economic activity, however, it is not going to address all what happened with regards to human action.

With human behavior, it is always purposeful. It is driven based upon a need to improve the current condition—many would call this process, “the pursuit of happiness”. That need to improve the current condition is subjective to the individual. This drive to improve one’s condition, to seek happiness, is initiated by the human will.

This will is in all living creatures. It is the drive to push humans, and living creatures, to expand, grown, transform..similar to metamorphosis of a caterpillar to a monarch butterfly. This transformation must occur..organically, as if it is done any other way, it shall be to the detriment of the butterfly.

Human Action is Subjective

With humans, the use of the notion of will combined with other factors helps shape their direction in economic interactions. Since all humans are unique and subjectively different, the objectives and goals shall be different.

This notion was not uncovered, in the field of economics, until the thinkers such as Carl Menger, Stanley Jevons, and Leon Walras. Ironically, these three thinkers were able to draw similar conclusions regarding human behavior: Humans preferences are subjective. Since those preferences are subjective, mathematics can not capture all of the human action in a model, albeit it is still a useful tool to utilize.

Human action..Its subjectivity lends itself to dynamic interplay between individuals, firms, and the like. This makes the interaction very unpredictable…for central planners to accurately map out and manage an economy. Consider this: If an economy comprises millions of individuals, and those individuals each have their own subjective preferences, which change each second, the task of successfully planning an economy would be near impossible. That is because it is impossible. The Soviets, for example, tried, failed, and the collapse was inevitable.

Subjective Value Ranking

Humans are driven by the human will, as a life force that pushes them to action. However, the individual things that humans prefer to act upon are varied. That variance is based upon the fact that humans value things differently. This leads to the concept of utility. Utility is an economic term that describes, simply put, the things the economic actor places a value therein. Those things of value are not equal. Also: Since humans can place values upon multiple things, yet they can act on one value at a time, therefore, the human will have a ranking of some sort. This is not a conscious endeavor, as this ranking derives from other psychological means. The top of the utility ranking represents the highest valued items, as the ranking proceeds down, those value become less valuable to the human engaged in economic activity. It should be noted that this ranking can be altered at any moment in time, and many items are constantly changing, based upon a myriad of internal and external factors. From this value ranking concept, this begins the myriad of concepts used in economic thought. For example, the notion of interest rate is derived from this concept, as it is all about choosing items, from the utility ranking during different periods of space and time.

Centrally Planned Models

Based upon the fact, that value is subjective, and humans have individual things that value and rank, this lends itself to be impossible to “plan” out an economy using technical analysis. The central planner maybe able to gather some of the economic data, but it will simply be a partial historical account of human action. Statisticians can utilize that historical incomplete historical data and perform regression analysis to speculate future human behavior, to develop public policy, but there is a risk of error. This risk is magnified due to the fact that human’s value ranking is constantly changing, and if that phenomenon is aggregated with millions of humans, in an economy, that risk of error is increased exponentially.

When centrally planned models place a great deal of emphasis on centrally planning out a nation’s economy, it places a high cost upon it’s citizens. It does not allow the natural flow of human action to take place in the marketplace, causing stagnation and malaise. The natural flow of will, which exists in each individual, is impeded due to the high costs of Government fiat from its planners.

With a few individuals attempting to plan out the economic future for the masses, it would require a demigod to gather all the information, namely, the dynamically changing utility ranking of all its citizens, in order to successfully plan out an economy. Since no demigods are walking the planet, this would explain how egregiously centrally planned economies end up in tyranny. The economic costs are too high to have prosperity. Due to those high economic costs, the economic actors perceive that the attainment of their objectives are too costly. At this point, the human will is turned inward, and nihilism creeps into the psyche of the masses.

“What does nihilism mean? That the highest values evaluate themselves.”-Friedrich Nietzsche

During the time of the greatest Innovation and  Technology in human history, there is a paradox. The proliferation of technologies in various fields-all designed to make our lives simpler. New companies are able to blossom each second, providing new products and services. This increased competition, in many markets, has allowed natural resources to flourish and, as an end result, the end consumer has more options. The access to capital is unparalleled to no other time in the history of mankind. The advent of smart phones, internet, computers, and the like, have allowed consumers to connect across the vast globe more effectively and efficiently. Now: A trans Atlantic flight may take 5-6 hours. The flow of goods and services, across the globe is coming s a cheaper cost, as that benefits consumers everywhere. This translates into a higher standard of living, as compared to humans in prior centuries. Contrast these things to several centuries ago: It took weeks, well months to cross the Atlantic Ocean. The simple things in life, many of them were non existent: A microwave oven, a Television, and many more inventions.

At the time of this writing, per the mainstream economists, the economy is performing beyond expectations. The unemployment rate, per the central planners, is at record lows.
However, there is still this sentiment of malaise, despair, and frustration. Why is this the case?
One would think, with all of these external conveniences, people would have less discontentment. However that is not the case. The news continues to push forward a narrative of hopelessness, in the political arena, it virtually impossible to engage in a dialogue about public policy without the exchange turning into a vituperative verbal donnybrook.

The notion on nihilism, per the quote, has crept into many in the citizenry. Although, there is a cornucopia great things that are occurring during this epoch, things that were once held as important virtues, are not non-existent. How is this the case? Answer: The proliferation of the size and scope of Government.
Although this exposition is not a case for anarchy, nor is a case against the need for government, it is simply making an observation, rather, a critique of the current state of affairs.
The pervasive spirit, in today’s world is that solutions to internal problems must be looked outward for solutions. This way of thinking is misplaced.
The source of the will of power exists on the inside of each individual, without it, man is doomed to not expand or grow. When solutions are looked upon to, let us say, Government, this creates a long term hurdle to the will to power. How is this possible?

My Tax Refund is Lower! What??

My Tax Refund..Man!

Tax Season: The time of the year we are all hit with the fantastic commercials regarding getting the best refund, or the most refund, or whatever jingle to capture your attention. However, as I scan social media, and listing to various conversations with people, I see many people who are concerned about receiving a lower refund. Yes, a huge concern..or is it?

A relevant Read: Americans Work Almost 4 Months Just to Pay Taxes

The IRS Thanks You

We all know the IRS sends out “Thank You” cards to all of its clients, when they receive taxes during the year. Wait, they do not. The issue: If you are receiving a refund, this is simply a return of the tax withholding taken out throughout the tax year. In short, you are giving the IRS a loan.Great work.

Wait, hold up..a loan?

Yes, a loan. Even better: An Interest FREE loan. The tax paper work, that designates the withholding amount, tells your employer how much to take out in taxes each paycheck. When you file your taxes, you may receive a refund..maybe.

The Opportunity Cost: It’s Lost

Based upon that scenario, it is an interest free loan given to the IRS. As previously mentioned, you may receive all the money back. Contrast that if you owe the IRS: Penalties and interest are charged if you owe them. Are you able to borrow money from the bank without having any interest charged to you? No. Consider what could have done with the money withheld..oh and the lost interest. Most people are lining up to receive their tax refund sooner, as they are borrowing that money from a financial intermediary to receive their money..which was loaned out to the IRS.

Cash Flow Analysis: Employee vs Business

With regards to how taxes are levied, there is a fundamentally stark difference between an employee versus someone who owns, or controls, a business. With an Employee, when he is paid, his gross earnings are realized…only for an instant. After that moment, taxes are taken out of the employee’s paycheck. Note: The employee can have benefits come out before taxes are assessed, which potentially lowers the gross income amount—this amount is used to calculate the taxes withheld.  After all of those taxes are withheld, the employee can spend what is left over. In short, Uncle Sam obtains his taxes first.

Contrast that to the business owner, assuming he controls/owns a business entity, he earns revenue for his business, pays out expenses, and sees a profit or a loss. A profit is the case if the business owner earns, in revenue, more than he pays out in expenses. The amount that is left over, profit, is used to determine how much in taxes are assessed. If the business shows a loss, the business owner’s tax liability is mitigated, in many cases. Example: Amazon. How does Amazon Pay $0 in Federal Income Taxes?

Conclusion

Taxes, withheld during the year by the taxing authority, is a loan once “refunded” at the end of the tax year. There is a difference, with regards to taxes, between being an employee versus a business owner. The ability to mitigate and take advantage of the tax code favors heavily toward the business owner. Of course, this is a very simplistic example, simply to demonstrate conceptually the differences, as these things can vary based upon the specific situation. That is why working with a tax professional is advised strongly when working with your taxes.

Relevant Article: Americans Work Almost 4 Months to Pay Taxes