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by the ever-interesting Steffen H. from Berlin; with gratitude for his contribution

For Paul H. Rubin, Professor of economics at the Department of Economics, Emory University, Atlanta, folk economics is the intuitive economics of untrained people, which is concerned with distribution, not with any efficiency gains from economic activity. Those people think of prices as allocating wealth but not as influencing allocation of resources or production of goods and services. The amount of a good traded is fixed and independent of price. The world of folk economics is a zero-sum world, and the primary economic problem for each individual is to maximize wealth. Because one of the goods traded is labor, the number of jobs is also viewed as fixed. In the folk economists world for every new job someone else must lose a job.

For Rubin the work of evolutionary psychology, the discipline that applies principles of sociobiology to human psychology, can give some hints to the understanding of the often fundamental difference between folk economics and the view of economists. Our brains evolved to solve problems that persisted in the environment of evolutionary adaptation, a period when our ancestors were evolving to become human. Since humans became civilized little evolution has occurred, so much of our ancient mental architecture evolved in hunter gatherer societies, and our minds are best adapted to such societies. The mind is organized into modules and there is evidence that there is a module associated with exchange and monitoring of human behaviour; we are adapted to avoid being cheated. By far the longest period of our existence as humans was the period spent as mobile hunter –gatherers, with small human groups, little social structure, little food storage and because of the small size of markets little division of labor or specialisation. Gains from trade were small, and a common and important form of exchange important for survival would have been intertemporal exchange of the same good, a form of reciprocal altruism that is unrelated to specialisation.

Shirking could have been in the form of refusal to provide one’s share or not spending sufficient effort on food providing. If someone had substantially more than others, it may have been the result of unwillingness to share or reciprocate for past benefits received. Wealth inequalities were probably due to shirking by refusing to share. Our ancestors payed careful attention to this behavior and punished those who are perceived as not sharing sufficiently. To avoid being victimized or cheated it would have been important for individuals to monitor the terms of exchange. This is a world of world of strong reciprocity and a form of exchange that anthropologists call equality matching, the core of intuitive (folk) economics. This avoidance of shirking and the moralistic aggression associated with cheating would have limited the possibility of negative-sum interactions, such as theft. If our minds evolved in this situation, then current innate economic modules should be adapted to this setting.

The implication of this is that for many economic problems folk economics will get the wrong answer. There are a lot of examples: A prominent example is the naïve understanding of international trade, focused on the effect on jobs, not on production and consumption. Lobbying from firms and workers in import competing industries is made easier because of the folk economic beliefs in the fixed number of jobs. In addition minimum wage laws and laws mandating comparable worth will appear to serve only to transfer income, without effects on employment rates. Another example is the folk public finance focus on the distribution of taxes, without consideration of the implications as incentives for behavior. Moreover the folk economics view of business success as reflecting harmful behavior may be influenced by zero-sum thinking. If wealth in our ancestors world was limited and if the main way to be wealthy was to avoid one’s responsibility to share, then these attitudes could be part of our mental architecture.

In his paper[1] Rubin makes some implication for the behavior of economists and he concludes that…
...It is important to overcome the errors of folk economics because voters who believe these errors will favor counter productive policies. Economists would do a better job of persuading others and of teaching if we paid explicit attention to folk economics. Because untrained individuals do not fully understand gains from trade, training in economics is likely to improve welfare by increasing number of trading opportunities…
Further reading: [1] Paul H. Rubin (2003): Folk Economics,
Southern Economic Journal 2003, 70(1), 157-171.
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