Folk economics.

Common sense theories are people's ordinary understandings of certain bounded bodies of information, such as the set of ideas that nonscientists hold about celestial phenomena (folk astronomy).

--from Handbook of Child Psychology, vol. 2, Cognition, Perception, and Language, excerpt by Wellman and Gelman (1998, p. 524)

[M]an's instincts ... were not made for the kinds of surroundings, and for the numbers, in which he now lives. They were adapted to life in the small roving bands or troops in which the human race and its immediate ancestors evolved during the few million years while the biological constitution of homo sapiens was being formed.

--from The Fatal Conceit, by Hayek (1988, p. 11)

1. Introduction

Although psychologists have studied "folk psychology," "folk physics," and "folk biology," among others, there has been less attention paid to "folk economics"--that is, the economic notions that naive (untrained) individuals have and the perceptions of such individuals about the economy.' There are some studies that do discuss learning of economic principles; a major compendium is Lunt and Fumham (1996). From the research reported there and elsewhere, it is possible to derive the principles of folk economics, although the authors do not do so. The key point is this: folk economics is the economics of wealth allocation, not production. Naive people or those untrained in economics think of prices as allocating wealth but not as influencing allocation of resources or production of goods and services. In folk economics, the amount of a good traded--whether in aggregate or by each individual--is fixed and independent of price. Moreover, each individual is concerned with the distribution of wealth and income (with particular but not exclusive attention to his/her own wealth), not with any efficiency gains from economic activity. The world of folk economics is a zero-sum world, and the primary economic problem for each individual is to maximize his or her own wealth in this world. One of the goods traded is labor, so the number of jobs is also viewed as fixed. Thus, in folk economics, if one person gets a job someone else must lose a job.

I do not want to imply that people cannot learn about positive-sum interactions or about efficiency. Those of us who teach economics make our livings by exactly this form of teaching. Caplan (2001) has shown that more educated people in general think more like economists, and of course we economists ourselves have learned to do so. But the point is that it must be learned; it is not an innate piece of knowledge. Speech is innate; all humans in normal environments learn to speak. Reading must be taught; it is not innate. Economics is more like reading than like speech. Psychologists are becoming increasingly comfortable with the notion that certain patterns of understanding are innate, that is, hardwired (Barkow, Cosmides, and Tooby 1992; Pinker 1997, 2002; Buss 1999). There is a good bit of evidence that we are hardwired to be vesy good at protecting our own interests and at detecting cheating in an exchange situation (Cosmides and Tooby 1992). But being able to look out for our own interests is not the same as being able to detect social gains from exchange, and this is what is lacking in folk economics.

In the next section I present some evidence about the nature of folk economics. I then provide an evolutionary explanation. The following two sections present some implications, first analytic implications and then implications for economists in doing economics. The final section is a summary.

2. Evidence

The evidence for the zero-sum hypothesis is indirect. (2) However, there are several sources of such evidence. I cite three sorts of evidence: evidence from learning of economics, evidence from surveys of economists and others; and evidence from others who have examined similar issues.

Learning Economics

The first and most important piece of evidence for the zero-sum hypothesis is from the psychological literature studying learning of economics, as summarized in Lunt and Furnham (1996). Most of this book consists of articles by psychologists, not economists. (3) Most deal with the understanding of experimental subjects (often children) of prices and what the authors discuss as economics. But in none of the chapters is there any reference to prices or incomes serving any sort of function in directing production, or any sort of efficient allocation function. Rather, every reference discusses prices as serving to direct resources toward or away from a particular individual, but with no reference to efficiency. This might mean that the subjects of the studies did not understand the efficiency implications of prices. It may also mean that the authors of the studies, trained as psychologists but not as economists, did not fully understand the role of prices. If psychologists who specialize in studying learning of e conomics do not understand the role of prices in achieving efficiency or directing resources, then this is itself evidence that folk economics does not include such an understanding. It is interesting that the index to the book contains no entry for efficiency or productivity, or for anything like gains from trade.

Much of the discussion of economics deals with what might better be called home economics--the analysis of consumption behavior (e.g., Pliner et al. 1996). Here the goal is to be a wise consumer--to obtain the best value for oneself in the marketplace. Dickinson and Emler (1996) discuss children's learning about wealth distribution. (4) They argue that explanations for the distribution of wealth are "ideological" (p. 49). They indicate that "adolescents and adults explained wage differentials predominantly in terms of individual effort: how hard people worked, how much they had studied, how many qualifications they had obtained, how important they were to society" (p. 50). They indicate that capitalist arguments for inequality are "that large differentials are the natural outcome of market forces and serve as incentives for achievement" (p. 50). Additionally, "... adults were more likely than adolescents to provide explanations for wage differentials in terms of economic and political criteria such as market forces, social values and trade union pressure, though such explanations are still less common in adulthood than individual equity-type explanations" (p. 65).

Nowhere in the chapter is there any mention of allocation based on productivity or any indication of productivity differentials. There is no discussion of wages directing labor toward higher valued occupations or of some individuals being more productive in some jobs than other individuals. The flavor is one of an existing array of jobs, some paying more than others, and individuals competing for these jobs--but no discussion of why the array exists or of the benefits of differential wages. Indeed, the phrasing of the issue itself--why are there wealth inequalities?--is an example of zero-sum thinking; an economist would begin by asking what determines wages and then perhaps ask why they are unequal. Similar analyses are in Dittmar (1996) and Leiser and Ganin (1996).

Surveys

A second source of evidence is analysis of responses by economists and others to various survey questions. The best source is the Survey of Americans and Economists on the Economy (SAEE). (5) Blendon et al. (1997) and Caplan (2001, 2002) have analyzed these results. The questions deal with specific policy issues and so cannot be directly used to measure differences in underlying models of the economy. But the major difference between economists and others is that "the public is much more pessimistic than economists" (Caplan 2002, p. 439) and "economists are systematically more optimistic about the past, present, and future of the economy than other people are" (Caplan 2002, p. 441). This is quite consistent with a world in which economists understand the possibility of productivity increases and economic growth but the public has an intuitive zero-sum mentality. Neither Blendon et al. nor Caplan suggests this explanation, but it is consistent with both analyses and with Caplan's argument that noneconomists si mply are incorrect about many issues. Blendon et al. also provide several hypotheses to explain this difference, but they do not allow for a fundamental difference in economic understanding. Interestingly, the only question in which economists indicate more concern than the general public is with respect to rate of productivity growth; economists are significantly more likely to name this as a problem than the public. This is, of course, consistent with a world in which the public does not focus on growth. However, economists sometimes commit the same sort of zero-sum error: "If the rich get more, that leaves less for everyone else" (Krugman 2002, p. 67).

Other Authorities

Steven Pinker (2002, p. 221) makes an argument similar to that made here. He argues that there is an "intuitive economics" associated with "reciprocal exchange, in which one party confers a benefit on another and is entitled to an equivalent benefit in return," an exchange that is zero-sum in goods (but not in utility). He also points out that people show no intuitive understanding of "modem physics, cosmology, genetics, evolution, neuroscience, embryology, economics, and mathematics" and that there is no way that the mind could have evolved specific modules or tools to understand these domains. While economics is only a small part of the material covered in this book, and while Pinker does not discuss economics in the level of detail that I use, his analysis is quite consistent with mine, although they were developed independently.

This analysis of divergence between economists and others is not new. Newcomb (1893), although not relying on data, suggests that there is a fundamental difference between what he calls "popular political economy" and the views of economists, and he suggests that the former "are not peculiar to our time or country: they are a part of the heritage of the race, which a century [now two centuries] of teaching has not sufficed to eradicate" (p. 385). As discussed below, Hayek (1988) also makes this point.

3. Evolutionary Basis of Folk Economics

Modern theories of the evolution of the mind indicate that our brains evolved to solve problems that persisted in the environment of evolutionary adaptation (EBA). This is the period when our ancestors were evolving to become human. It is generally thought that relatively little evolution has occurred since humans became civilized (in about the last 10,000 years), so much of our mental architecture is thought to have evolved in hunter-gatherer societies, and our minds are best adapted to such societies. (For a more detailed discussion of these issues, see Rubin 2002, Chapter l.) (6)

Modular Minds

The mind is organized into modules, with each module specialized to solve a class of problems that existed in the EEA. For example, there is a module associated with language (Pinker 1994). There are also modules associated with sex and mating behavior (Buss 1999). These modules exist for essentially economizing reasons: It would simply be impossible for a general purpose calculator to solve the problems that face a human being, and so the calculator (the brain) must be specialized in order to economize on reasoning power. This notion was first associated with the study of leaming of language. It would be impossible for an infant to learn language with no hardwired basis for such learning. It was the understanding of this difficulty that led psychologists to study the more general modularization of the mind. If there is a module for understanding economic behavior, then it should be associated with solving problems involving economic conditions in the EEA.

There is evidence that in fact there is a module associated with exchange and monitoring of human behavior (Cosmides and Tooby 1992). In experiments involving logical relationships, subjects do better when they are told that the issues in the experiment have to do with monitoring of commitments and enforcing agreements than when the same problem is presented as a simple logical puzzle. This implies that we are adapted to avoid being cheated. However, it says nothing about any ability to observe efficiency or gains from trade (except those going to ourselves).

Mobile and Sedentary Hunter-Gatherers

Anthropologists divide human existence into two basic periods. The key distinction is between mobile and sedentary societies, also called simple and complex (Knauft 1991) or egalitarian and nonegalitarian hunter-gatherers, or foragers (Kelly 1995). Mobile hunter-gatherers are also called immediate-return hunter-gathers, meaning that "no surplus is created and resources, especially food, are consumed on a daily basis" (Kelly 1995, p. 31). By far the longest period of our existence as humans was the period spent as mobile hunter-gatherers. In this period, human groups were small, and there was little social structure, little food storage, and little division of labor or specialization. The only occupational specialization was by age (Kelly 1995, table 8-1, p. 294). Such people traveled light and did not encumber themselves with possessions (Kelly 1995, p. 296, citing Woodburn 1980). This was also the pattern of our prehuman ancestors during the EEA, when our ancestors evolved to become Homo sapiens. The study o f mobile hunter-gatherers is relevant because this lifestyle approximates the lifestyle in which we evolved, and so we are adapted to this mode of living. Thus, insights into the period of nomadic hunter-gatherers would be relevant for understanding the hardwired pattern of the mind.

Complex hunter-gatherers differ in many dimensions; in particular, occupational specialization is common. Thus, this distinction (which Kelly attributes to changing from a mobile to a sedentary lifestyle) is the border between specialized and unspecialized roles for individuals in societies. By the time of large agricultural societies and the beginning of written history, specialization and division of labor were universal and important among humans. But this came late in our existence as humans--probably too late to have left a significant mark on our evolved preferences or intellects.

Evolutionary Environment

There are several economically relevant features of the EEA that affect folk economics. Societies were small--about 25-150 individuals. This means that possibilities for specialization and division of labor were quite limited. Adam Smith's admonition that "[t]he division of labour is limited by the extent of the market" has always been true, and small societies imply highly limited possibilities for division of labor (Smith 1776, book 1, chapter 3). While division of labor by gender is universal among humans (Brown 1991), there was little in the way of more complex forms of specialization.

Many anthropologists make essentially the same point regarding specialization among mobile hunter-gatherers. With respect to warfare, Keeley (1996, p. 46) indicates that "societies without specialization in the economic realm were unlikely to develop specialized warriors or units." Primitive conflict was unorganized and was usually a small raiding party attacking an individual in the rival group (Keeley 1996; Wrangham and Peterson 1996). Cameiro (2000, p. 12,929) indicates "fulltime craft specialists come into being only when the aggregate demand for their products has reached a certain threshold." Maynard Smith and Szathmary (1999, p. 148) believe that division of labor was uncommon until relatively recent times: "Populations of, at the most, a few hundred individuals, with little division of labour, except, probably, that between the sexes, have been replaced by societies of many millions, dependent on extensive division of labour." This limited amount of specialization is consistent with the conclusion of Stiner et al. (1999, p. 193) that "[l]ow human population densities during most of the Middle Paleolithic imply that group sizes and social networks were small, which certainly limited the numeric scope of individual interactions. Under these conditions the possibilities for evolution of complex sharing and exchange behavior as ways to counter the effects of unpredictable resource supplies would also have been quite limited." (7)

Edgerton (1992) discusses the converse with respect to the Tasmanians. These people at one time had a relatively advanced technology developed before the flooding of the land bridge that had connected them to Australia. Over a 10,000-year period of isolation, they progressively lost most of their technology. This may simply be because the size of the population and of the small bands was insufficient to support any significant level of division of labor. Edgerton describes other societies that lost various forms of technology as a result of isolation or other sources of population reduction, including the loss of the ability to make canoes and pottery in parts of Melanesia and the loss of the skills for making kayaks among one group of Inuit. He also describes loss of social complexity as some populations have become smaller (p. 163).

Mobility meant little in the way of capital accumulation; all possessions had to be portable. Our ancestors used wood, stone, or bone tools and perhaps some other simple implements, but all of these had to be moveable. "They tend to use portable, utilitarian, easily acquired, replaceable artifacts ... and avoid those which are fixed in one place, heavy, elaborately decorated, require prolonged manufacture, regular maintenance, joint work by several people, or any combination of these" (Woodburn 1980, p. 99, quoted in Kelly 1995, p. 296). Thus, there was little capital and little value to developing an ability to understand the productivity of capital--which may explain the intuitive appeal of various "labor theories of value" that Marxists and others have adopted.

There was very little technological advance during the EEA. The pace of technological change in primitive societies seems amazingly slow by contemporary standards. For example, the Acheulean hand axe tradition lasted for more than one million years in Africa, Asia, and Europe. In the Upper Paleolithic, about 40,000 years ago (when Homo sapiens had evolved), "major technological change" is defined as taking place when a change in stone techniques transpired over "a few thousand years." The Gravettian tradition in Europe lasted from about 27,000 to about 12,000 years ago (all data from Gowlett 1992). This sluggish rate of technological improvement may have been due to comparatively less-intelligent prehuman ancestors in the early periods. More recently, it can be understood as being due to low levels of population and hence fewer individuals to create new technologies (Simon 1981/ 1996; Kremer 1993; Jones 2001) and perhaps poorly defined property rights in innovations (Jones 2001). Given this low rate of techni cal change and innovation, there was no incentive to evolve a mental mechanism for understanding or rewarding innovation.

There was little growth--so little that no individual would observe any growth over his/her lifetime (Kremer 1993). Each person would live and die in a world of constant technology and income. Thus, there was no incentive to evolve a mechanism for understanding or planning for growth. Indeed, to the extent that our ancestors lived on the Malthusian margin, any changes in circumstances were more likely to be harmful than beneficial, so we would have had a tendency to be leery of change.

Exchange, Monitoring, and Shirking 

There were, however, possibilities for exchange, and so a monitoring mechanism to limit shirking was useful. Some exchange would be of simple goods--one forager may have more nuts, another more berries, and exchange would occur. A common and important form of exchange would have been intertemporal exchange of the same good, a form of reciprocal altruism (Trivers 1971) that is unrelated to specialization. If I have a successful hunt this week, I may give you some of the meat in expectation that you will reciprocate next week. For individuals living on the margin of subsistence, such intertemporal exchange could have been extremely important for survival (Kelly 1995, p. 164). Shirking could have been in the form of refusal to provide one's share if successful (the EEA form of tax evasion) or not spending sufficient effort on hunting, planning to benefit from other's work (the EEA form of welfare fraud). In such a world, if someone had substantially more than others, it may have been the result of unwillingness to share or reciprocate for past benefits received. Foragers pay careful attention to this behavior and punish those who are perceived as not sharing sufficiently. It would have been important for individuals to monitor the terms of such exchange to avoid being victimized or cheated.

This is a world of strong reciprocity and of a form of exchange that anthropologists call equality matching, which Pinker (2002) claims is the core of intuitive economics. It is contrasted with market pricing, the system economists study. When there is a mismatch between the two systems, then hostility and conflict can result. An example is found in Waldfogel (1993), an article that used market pricing methods to analyze Christmas giving, a transaction normally analyzed using equality matching. In his study of insurance in traditional rural communities, Platteau (1997) indicates that community members view insurance as a form of "balanced reciprocity," and that the "abstract frame of mind" needed for efficient insurance markets is lacking. This limits the amount of insurance available to such people.

Shirking could also have occurred through not providing one's share in cooperative ventures. Cooperation was useful in hunting big game (Ridley 1997) and also in primitive warfare (Wrangham and Peterson 1996). Both of these activities were dangerous, and so there would have been strong incentives for shirking. Kelly (1995) describes such shirking and indicates that modem foragers spend much time analyzing the social behavior of associates to monitor shirking. The monitoring module identified by Cosmides and Tooby (1992) could have evolved to monitor these activities in an economy with little specialization and little division of labor.

This avoidance of shirking and the moralistic aggression associated with cheating would have limited the possibility of negative-sum interactions, such as theft. Moreover, even primitive societies seem to have developed relatively efficient property rights (Bailey 1992). Indeed, even chimpanzees have primitive property rights (de Waal 1996). Thus, although the world may have been zero sum, there were forces in place to limit the extent to which it could become negative sum.

To summarize, we evolved in situations of little specialization and division of labor, little capital, low technological change, and little or no economic growth. There was some exchange, including intertemporal exchange of the same good, and possibilities of shirking. If there were wealth inequalities, they were probably due to shirking by refusing to share. If our minds evolved in this situation, then current innate economic modules should be adapted to this setting, and this appears to be the case.

The argument made here is consistent with some work of Hayek (e.g., Hayek 1988). Hayek discusses the sort of evolution I have mentioned and indicates that those beliefs and preferences that evolved in small face-to-face societies would not be suited to modem large societies. He also explains some of the hostility to capitalism in terms of the inconsistency of the attitudes needed in a capitalist society with evolved moral beliefs and preferences. For example, he argues that in our day-to-day life we cannot satisfy our "deep-seated 'altruistic' desires to do visible good" (p. 19).

Alternative Theories

An alternative explanation for the observations about folk economic beliefs discussed above is that these beliefs are the result of competing economic theories and are learned by people who accept these theories. But this hypothesis gets the causality exactly backward. Theories competing with neoclassical economics are incorrect. (8) Then we must ask why these incorrect theories are accepted. Part of the answer may be that in some circumstances some individuals have a private interest in promoting or accepting incorrect theories, as discussed in the next section. However, the structure of theories that people do accept is consistent with folk economics. That is, from the potential universe of self-interested theories, only a small subset is politically useful, and this subset is consistent with folk economic beliefs. (9)

One example of a clearly incorrect theory that has been shown to be incorrect is Marxism. But even though the most important social science experiment of the twentieth century clearly demonstrated the error of this system, many intelligent people (including many academics) apparently accept this theory. There is no such social debate about phrenology, an incorrect psychological theory, or about phlogiston, an incorrect chemical theory. One reason that Marxism became a prominent theory and continues to survive is that at least some of its tenets are consistent with folk economic beliefs. These include the labor theory of value, a notion consistent with the economy of the EEA with little or no capital, and the unimportance of incentives. The notion of the class struggle itself is an example of zero-sum thinking. Thus, Marxism is at least in part consistent with folk economic beliefs.

Another hypothesis is that folk economic beliefs are a product of culture, not an innate property of the mind. But if this were so, then it would be relatively easy to unlearn these beliefs. There is no reason to expect that cultural errors should persist for over 200 years (about ten human generations), the time since Adam Smith first pointed out the benefits of a market economy. We have easily learned to adapt to numerous new technologies in much shorter times, when these technologies did not conflict with innate mental modules. Those who might prefer cultural explanations are making arguments based on the mind as a "blank slate" with no innate tendencies, an argument decisively rejected by modem theories of evolutionary psychology (Pinker 2002).

It has also been suggested that zero-sum models are easier to understand and that we use such models for this reason. This may be so. But natural selection would have been capable of structuring more complex models of gains from trade if such models had been worthwhile. For example, rules of language are extremely complex. For another example, the rules and mechanisms involved in cheater detection are also complex. As discussed below, there are benefits in today's world from understanding the gains from complex exchange. (10) If our ancestors had engaged in complex exchange, then mental modules for understanding this exchange could have evolved. Thus, the fact that we understand only simple models without specific instruction is evidence that there was no benefit from evolving a structure for more complex models.

4. Analytic Implications

The implication of this analysis is that for many economic problems, folk economics will get the wrong answer. Moreover, the answer will be wrong in predictable ways. Folk economics will stress the fixed sum, division-of-the-pie aspect of a problem, rather than the size-of-the-pie issues. I now provide some examples.

The simplest example is the theory of demand. Economists have an elaborate theory constructed from underlying utility functions. But one of the more difficult tasks in teaching basic economics is to disabuse students of the notion of needs. A need is the essence of fixed thinking: the amount of some commodity to be consumed is viewed as being fixed and independent of prices.

The most prominent example is the naive understanding of international trade. We would expect naive individuals to focus on the effect of trade on jobs, not on production and consumption. This is of course what we find. The SAEE as analyzed by Caplan indicates that the general public is more likely than economists to think that trade agreements have cost the U.S. economy jobs, that there are too many immigrants, and that companies are sending jobs overseas. Firms and workers in import competing industries would have incentives to encourage such beliefs in lobbying for protection. However, the lobbying is made easier because of the folk economic beliefs in the fixed number of jobs. That is, it is easier to obtain legislation that is consistent with folk economic beliefs. Newcomb (1893) indicated that the disagreement between economists and others was most marked in the case of trade. In recent times economists seem to have mainly won the battle over tariffs (except for especially powerful interest groups) in t hat tariffs are generally at very low levels, but the questions in the SAEE indicate that this victory is still fragile. (11)

Naive labor economics also focuses on jobs. This is because of the fixed-size views of folk economics, If the number of jobs, like other aspects of the economy, is fixed, then it is important to have one of them. Again, this is clear from the SAEE. Some of the issues related to jobs were mentioned in the discussion of trade--jobs being sent overseas, excess numbers of immigrants. In addition, the public is more likely than economists to wony that technology is displacing workers and that companies are downsizing too much. Newcomb refers to the public view that the benefits of an industry are the jobs involved, rather than the value of its output. An additional implication is that, since folk economics views the number of jobs as fixed, minimum wage laws and laws mandating comparable worth will appear to serve only to transfer income; they will seem to have no effect on employment rates. Again, those with an interest in promoting these laws will use the beliefs of naive citizens in lobbying.

Folk public finance analyzes the distribution of taxes, not the implications as incentives for behavior. The SAEE indicates that the public believes that taxes are too high, but also that business gets too many tax breaks, so the implication is that personal taxes are too high and business taxes too low. Business taxes are not perceived as affecting individuals, as would be consistent with folk economics. Static revenue analysis (as sometimes used by government agencies to project effects of tax changes) is based on the same sort of zero-sum thinking. With respect to public spending, as on a subsidy, the effect will be viewed as reducing individual costs of some good or service with no implication for amount demanded. This is why ex ante estimates of costs of medical insurance programs routinely underestimate these costs.

There are implications for law and economics. Modem American product liability and medical malpractice law can best be understood as if jurors and others believe that the only effect of a judgment is to redistribute wealth from businesses or physicians, or their insurance companies, to injured consumers, with no effects on investment, production, or prices. More generally, Posner's analysis of the law in terms of economic effects, while now commonplace, was in its time revolutionary (Posner 1973/1998; Rubin 1977). Legal analysts thought of property law as allocating rights but did not consider the efficiency implications of alternative allocation schemes or the possibility of property moving to higher valued uses. Similarly, analysis of contract was in terms of fights and division of existing wealth, but with no thought of the implications of different rules on future behavior or on incentives or efficient risk allocation. Even now, much legal analysis is in terms of various notions of fairness, with too litt le attention paid to incentives for efficiency (Kaplow and Shavell 2002). Even attitudes toward crime may be influenced by zero-sum thinking. Glorification of some criminals (Robin Hood, the Godfather, the Sopranos) may be easier in a world where the only effect of crime is viewed as redistribution; in reality of course crime leads to reallocation of resources and reductions of real incomes as people take measures to avoid victimization costs.

Another example is from industrial organization. Anyone teaching undergraduates must be impressed with the naive belief that predatory pricing is commonplace and a normal business tactic. This notion is related to folk economics since in a zero-sum world the only way for one firm to grow is to take business from others. Untrained individuals also believe that monopoly is much more common than economists believe it is. The SAEE indicates that noneconomists are much more likely than economists to believe that business profits are too high, that top executives are paid too much, that greed of oil companies explained the "recent" rise in gasoline prices, (12) and that the price of gasoline is too high. This survey finds that the mean estimate by the public of profit rates is 46.7%, while the correct value is 3%. A popular topic for policy debate is the pricing of pharmaceuticals; this debate proceeds as if profitability had no effect on research or on the amount of innovation in the industry.

The folk economics view of business may explain the way business is portrayed in movies and fiction. Stein (1979) shows that movies generally portray business in a negative light. A more recent example is from the 1987 movie, Wall Street, in which a financier engaged in efficiently moving assets from lower to higher valued uses is depicted as evil. (13) Jobling (2002) has argued that in nineteenth-century novels, characters did not become successful through business practices because audiences would have viewed success through business as reflecting harmful social behavior. If wealth in the EEA was limited and if the main way to be wealthy was to avoid one's responsibility to share, then attitudes viewing the wealthy as evil could be part of our mental architecture. This is consistent with some religious beliefs; consider Jesus' saying that "[i]t is easier for a camel to pass through the eye of a needle than for a rich man to enter the kingdom of God" (Matt. 19:24). Ayn Rand did portray businessmen in a favor able light, but her novels, while appealing to a subset of people, have not been major popular successes.

5. Implications for Economists

This analysis has implications for the behavior of economists.

Costs of Errors

The first point to note is that it is important that errors of folk economics be corrected. It may be less important to correct errors associated with other disciplines such as folk physics. For example, many people believe that substances are homogeneous throughout. It is true that if sugar cubes are broken up, the component parts are sugar. But ultimately one comes to molecules of carbon, hydrogen, and oxygen, not sugar. This notion is difficult for many to grasp--apparently including even some college chemistry students. (This example is from Wellman and Gelman 1998, p. 537.) But nothing hinges on this error. Chemists and others who produce or use substances are aware of the relevant properties. Seldom if ever does the average consumer need to understand the molecular properties of a substance, and a misunderstanding of these properties has few Costs.

For economics, as it applies to daily life, the same point would apply. As indicated above, humans are good at exchange and at monitoring behavior of others to avoid being victimized. As Bastiat (1845/1996, section 1, chapter 13, Theory and Practice in paragraph I.13.23) has said, "each man is in practice an excellent economist, producing or exchanging according as he finds it more advantageous to do the one or the other." (14) This ability to engage in advantageous exchange would be the equivalent of understanding the gross properties of a substance, as in using sugar in cooking. But economic understanding also interacts with political outcomes. In a democracy, voters who may have misconceptions about economics can vote for politicians who will implement erroneous and costly policies. In a dictatorship, the dictator himself may make similar errors. (15) Thus, misunderstandings associated with folk economics can have important consequences for economic policy. Moreover, since these errors have public but not private costs, there is no obvious self-correcting mechanism to weed them out.

There may be an analogy in biology. Folk biology resists the notion of evolution, and assumes there is an essential character to each species (Wellman and Gelman 1998, p. 553; Pinker 2002, p. 229). This may explain some of the resistance toward teaching evolution, an issue that periodically crops up in school board politics. (16) Since there are real costs from misinforming children, folk biology may sometimes impose burdens on society similar to those from folk economics. Folk biology may also be responsible for the unwillingness of many to use genetically modified foods or other products, a potentially costly error (Pinker 2002, p. 230). Pinker argues (2002, p. 235) that there should be high priority given to teaching "economics, evolutionary biology, and probability and statistics in any high school or college curriculum," for essentially the sort of reasons discussed here. Pinker is trained as a linguist and works as an evolutionary psychologist, so his claims for the importance of economics are not subje ct to criticism as being self-serving.

How to Persuade

There are also implications for the way in which we try to convince noneconomists of the wisdom or desirability of our proposals. Basically, folk economics notions indicate that we should start one step farther back in our arguments than might be customary. That is, we need not only convince listeners or readers that a particular proposal is efficient; we must first convince them that there are efficiency differences between proposals.

Consider taxation as an example. In folk economics, different tax policies serve to allocate a fixed burden among various classes of taxpayers. Such policies are analyzed in terms of notions of fairness. Public finance theory indicates that different tax rules will have implications for the level of work, saving, and investment in the economy and some rules will lead to larger total incomes than will others. If an economist is debating a noneconomist over tax rules or writing an analysis to be read by a noneconomist and the noneconomist thinks only in terms of fairness while the economist considers efficiency and incentives, then the discussion will be fruitless. The debate will proceed more usefully if the economist first convinces the noneconomist that rules of taxation have effects beyond fairness and distribution and then considers the implications of different rules.

In some of my own policy analyses I have committed the same error. I have written extensively about the effects of direct-to-consumer advertising of pharmaceuticals (e.g., Masson and Rubin 1985). In this work, I have discussed the effects of advertising on informing consumers about the properties of existing drugs. But I did not discuss the effects of advertising on creating increased profitability, thus causing more drugs to be invented. While this point may be obvious to an economist or policy analyst (which is why I did not mention it) it may not be so obvious to others, and so some of the benefits of the policy may have been missed.

Another implication is in the teaching of economics. If we begin with an understanding of the students' knowledge of folk economics, then we may be able to teach more by first addressing these beliefs. In teaching demand, this is done. We do spend time discussing the concept of needs and the slope of demand curves. However, the basic element of responsiveness to prices on the supply side is often lost in a maze of cost curves. An intuitive discussion that counters the innate learning of the student might be more effective. (17)

Effects of Studying Economics

A final implication deals with the effects of learning economics on general citizenship. There has been a lively debate in the Journal of Economic Perspectives on this issue (Carter and Irons 1991; Frank, Gilovich, and Regan 1993, 1996; Yezer, Goldfarb, and Poppen 1996). This issue was first raised by Marwell and Ames (1981), who found that first-year graduate students in economics were less likely to contribute to a public good than were others. Carter and Irons showed that economics students behaved differently in playing the ultimatum game than did others. (18) In particular, economics students as Responders were more likely to accept a smaller offer than others (a point to which I return below) and as Proposers were more likely to make a smaller offer as well. Their analysis showed that this difference was due to self-selection, rather than to learning.

Frank, Gilovich, and Regan (1993) found that economics students were more likely than others to defect in a one-shot prisoner's dilemma. For noneconomics students, cooperation increases as they move from underclassmen to upperclassmen, but there is no trend for economics students, leading them to conclude that the lack of cooperation may be due to training in economics. They present additional survey evidence in favor of the learning hypothesis. They conclude with some discussion of possible harmful effects of noncooperation.

Yezer, Goldfarb, and Poppen (1996) criticize Frank, Gilovich, and Regan (1993). Yezer, Goldfarb, and Poppen indicate that one benefit from studying economics is that students learn about gains from voluntary exchange. "In fact, our experience in teaching principles of economics is that most students enter the course believing that every market transaction creates a winner and a loser" (p. 178). This is exactly the implication of folk economics. They look for honesty among economics students by leaving "lost" letters containing $10 in upper level economics and in other classes, and find that letters are significantly more likely to be returned by economics students. They replicate the Frank, Gilovich, and Regan survey and find statistically insignificant results.

In their reply, Frank, Gilovich, and Regan (1996) agree that training in economics may make students understand that there are mutual gains from trade. Most of their response deals with the survey questions. However, it is also interesting that Frank, Gilovich, and Regan (1996) refer to the Carter and Irons ultimatum game experiments as showing that economics students are less likely to cooperate. They also argue that understanding the existence of gains from trade does not solve social dilemmas. These are both incorrect. The ultimatum game experiments have two results: Economists in the role of Proposer offer smaller payments, which does tend to lead to less cooperation, but economists as Responders are willing to accept smaller payments, which leads to more cooperation. This second result is exactly consistent with training in economics leading to more cooperation, not less. It means that economists are less likely to be involved in bargaining breakdowns and unsuccessful negotiations. Thus, at least one cla ss of social dilemmas is solved more easily as a result of training in economics.

6. Summary

Folk economics is the intuitive economics of naive or untrained people. Folk economics considers primarily allocation and distribution. It does not allow for or understand responses to incentives. The principles of folk economics evolved when our ancestors lived in environments with small societies (25-150 individuals) and little in the way of specialization, division of labor, capital investment, or economic growth, although exchange and shirking, and the monitoring of shirking, were important. For many economic problems, folk economics will get the wrong answer, but the direction of error is predictable. Folk economics can help us understand the opinions of untrained individuals regarding matters such as international trade, labor economics, law and economics, and industrial organization. It is important to overcome the errors of folk economics because voters who believe these errors will favor counterproductive policies. Economists would do a better job of persuading others and of teaching if we paid expli cit attention to folk economics. Because untrained individuals do not fully understand gains from trade, training in economics is likely to improve welfare by increasing the number of trading opportunities. There is evidence from experiments involving the ultimatum game that this is in fact true.

Received August 2002; accepted November 2002.

(1.) There are numerous studies of opinions of citizens on particular economic issues; some of these are discussed below. These tend to deal with specific issues at a particular time. They do not directly analyze the understanding of economic principles.

(2.) It should be possible to directly test these hypotheses using experimental economics techniques, specifically those that monitor the brain during decision making: see McCabe et al (2001).

(3.) Walstad (1996) is an economist, but his contribution does not deal with issues relevant for this analysis.

(4.) The chapter actually deals more with what an economist would call income distribution.

(5.) Sponsored by the Washington Post, the Kaiser Family Foundation, and Harvard University Survey (1996), summary available online.

(6.) This argument is from the field of evolutionary psychology (Barkow, Cosmides, and Tooby 1992). Evolutionary psychology is the discipline that applies principles of sociobiology to human psychology. See Laland and Brown (2002).

(7.) Ridley (1997) argues that there was substantial specialization. But Societies were too small to support much specialization until much later, when humans became sedentary.

(8.) If they are not, then I as the author and you as the reader of this paper are in the wrong business.

(9.) For example, it would be in our self-interest as economists to require that every transaction of over $10,000 be certified by a Ph.D. level economist, but there is little chance of such a proposal being adopted.

(10.) Which explains why we economists earn positive wages.

(11.) Discussions of the benefits of international trade also may be made more difficult since this issue may involve our innate xenophobic tendencies; see Rubin (2002).

(12.) The survey was done in 1996.

(13.) The most famous speech in that movie was by Michael Douglas's character, Gordon Gekko: "Greed is good. Greed is right. Greed works. Greed cuts through, clarifies, and captures the essence of the evolutionary spirit." Gordon Gekko in Wall Street, http://www.whysanity.net/monos/wall.html, visited November t5, 2002. While this seems a reasonable statement, I understand that Otiver Stone, the director, meant it as a negative comment.

(14.) I want to thank an anonymous referee for drawing my attention to this statement.

(15.) It perhaps speaks welt of the economics profession that few if any dictators arc trained economists.

(16.) Most recently in Atlanta: see Mary MacDonald, "Cobb's Vole on evolution in spotlight," Atlanta Journal-Constitution, September 27, 2002.

(17.) Pinker (2002, p. 222) also points out that it is important to consider the innate properties of the mind in designing effective teaching mechanisms.

(18.) In this game, two subjects are to split a fixed sum, $10 in the Carter and Irons example. One subject, the Proposer, proposes a division (in increments of $0.50). The other, the Responder, accepts or rejects the proposal. Economic theory would suggest a proposal of "$9.50 for the Proposer, $.50 for the Responder" and an acceptance of this proposal. Most subjects as Proposers offer a more even distribution, and moat Responders reject too uneven a split. For an interesting cross-cultural analysis of this game, see Henrich et al. (2001).

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Paul H. Rubin *

* Department of Economics, Emory University, Atlanta, GA 30322-2240, USA; E-mail [e-mail]. The author would like to thank Bryan Caplan, Marcel Fafchamps, Jonathan Hamilton, Charles Noussair, Richard Sansing, Jerry Thursby, participants in seminars at Dartmouth and Emory and at the Southem Economic Association 2002 Meetings and anonymous referees for helpful comments on earlier drafts, and Ian Jobling for useful discussions of the issues.