Man, Models and the Markets: Why Theology Has Something to Say About Economics

Ben Bernanke has gone soft.  The chairman of the Federal Reserve said this summer that economics should “understand and promote the enhancement of well-being.” His fellow economists have long worked with an ideal version of rationality to explain the “what” of how our economies function, he argued, while ignoring the irrational foibles of real people trying to grasp the “why” of the world.

I would argue that this is precisely the space in which theology should be speaking into economics. Yet for the most part, it doesn’t seem to be.

In recent years, economists have turned to psychology to better understand the realities of human behavior. While it’s been easy for economists to craft models based on their ideals of rationality, their understanding of humanity has been incomplete. As a result, behavioral economics has begun to influence economic assumptions about the rationality of man and markets in profound ways.

English: President Barack Obama confers with F...

English: President Barack Obama confers with Federal Reserve Chairman Ben Bernanke following their meeting at the White House. (Photo credit: Wikipedia)

Economics traditionally places humanity at the center of its study. Homo economicus roams freely in this area of study in all of his rational, self-centered glory. Birthed by John Stuart Mill, raised in its infancy by David Ricardo, and seen off to college by later economists like Gary Becker, homo economicus formed, in Becker’s words, the “heart of the economic approach to human behavior.”

The rational actor model of human behavior is a rough caricature, but it’s been incredibly useful as a basic assumption. It presupposes that at the micro level, human behavior can be subjected to rigorous examination with consistent outcomes. The broader market can be organized along certain set rules. The results can be tested, modeled, and invested with.

Most of the time, we look and sound pretty rational (or at least I like to think so). Our markets seem to function as they should and efficiently absorb much of the available information. Yet when rationality fails us, it can do so quite spectacularly. Financial crises lurk where logic has long since departed.  

In hindsight, it was only a matter of time before scholars decided that it might be useful to apply what psychology was learning about humanity to the study of economics. Daniel Kahneman and Amos Tversky provided the watershed moment for the nascent field of behavioral economics by publishing a groundbreaking study on what they called “loss aversion,” or how losses seem to hold disproportionately more sway in our minds than gains.

The main thrust of behavioral economics is that we often make bad choices and rely on logical fallacies.  We are not so rational and calculating after all it seems, at least not in practice.  And individuals separately making less-than-ideal choices can, in turn, throw off even the most well-oiled markets.

Yet ironically, homo oeconomicus at this point somehow became more human. No longer was he unswervingly rational. He was bound by a lack of information and time, by a brain that often falls back on mental short-cuts, and an emotional circuitry that sometimes goes haywire for seemingly no reason. He did not always do as he should.  His interests and actions fell out of line, as did his values.

Of course, Christian theology came to similar conclusions a long time ago. We are fundamentally fallen creatures who act and think in ways that run against God’s created order. Original sin is woven through the Biblical narrative. Economists did not need psychology to tell them that people can act irrationally and unjustly—if they had listened to the theologians, anyway.

Why don’t we study the links between the two fields? Both economists and theologians operate on the basis of certain fundamental beliefs on the nature of humanity. They are subjects under the sway of irrationality. They are both, as Michael Jinkins put it, “in the business of constructing belief systems based on faith assumptions, and both of us are subject to irrational forces.”

Economics is a long way off from developing a fully coherent and versatile alternative to the rational actor model. The alternative is a certain bounded rationality, informed at turns by psychology and theology. Individuals become more than creatures bent solely and selfishly on maximizing utility. Humanity is seen as both created and creator, fashioned in the image of God and yet embedded in its fallen nature and institutions. The potential ultimately is for economics to be both a hard science and a social science.

Theology can and should serve as a foundation for interdisciplinary study into economics, especially its behavioral kin. Economics needs to know why humans act the way they do and begin to construct a more complete science that reflects human nature. To be clear, Christian anthropology and secular psychology are not quite on speaking terms, but their contributions to economics may prove far more complimentary than most people think. Groups like the Acton Institute and the Institute for Faith, Work & Economics are blazing a path toward the reconciliation of these disciplines in the economic sphere.

In turn, policymakers should begin to assume a moral view of economics that’s much more wide-ranging in its aims. They need to begin constructing institutions that reflect a humanity that is at once made in the image of God and yet fallen, rational and yet bound by limitations. In short, economics should become more humble.

Theology has something to say on all of these fronts.   But the real question is whether economics will be willing to listen.

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  • Eric E

    Kahneman’s Thinking, Fast and Slow was one of my favorite books that I read last year. Some of the research that behavioral economics is undertaking is humbling, IMO. One result I’ve found especially interesting is that with many cognitive biases, knowing about biases doesn’t stop you from being biased. In other words, it isn’t just a matter of ignorance.

    I’m not sure if we can blame our non-rationality purely on the fall, though. In other words, our theology of creation should tell us that we aren’t homo economicus just as much as our theology of sin.

  • Peter

    There is a fundamental problem with your assertion that theology should influence economics, and I’m amazed that it’s 2012 and I still have to point this out. Economics, admittedly a social science, is still scientific enough to use the scientific method in the study of data; in other words, it is based on facts and evidence. Statistics are studied, hypotheses offered, and theories challenged to see if they fit with evidence. Its problems come from the difficulty in isolating dependent variables in the real world. Theology, as I’m sure you’re aware, in no way considers facts, evidence, or any semblance of science. This will forever make it incompatible with legitimate fields like economics and psychology, which are rooted in the observable evidence of reality and the scientific method. Theology might have some influence in advocating certain moral positions over others, but that’s about the extent of it, and puts it on par with L. Ron Hubbard’s writings. Recognizing this fundamental difference and respecting it will probably save you a lifetime of wondering why these people ignore you when you write nonsense like “economics should be more humble.” Such a silly idea, that interpreting data and positing theories in order to explain facts can be given an adjective like arrogant. Much more arrogant, in my opinion, would be to argue that one’s Bronze Age superstitions—of which you require no evidence or proof, nor do you allow others to challenge this complete lack of empiricism—hold the key to resolving modern economic debates, all because of some clever-sounding prose and absolutely zero real facts. Congratulations, your one-page essay has cheapened the work of those actually collecting data and trying to explain the world as it exists. But that’s another can of worms; in the meantime, suffice it to say that while this article might pass muster in a theology course, I’d love to see the reactions if you read this in an economics seminar.

    • http://www.mereorthodoxy.com Matthew Lee Anderson

      Peter,

      Heh. The idea that you are lumping theology in with L. Ron Hubbard’s writings is a good one. Thanks for dropping by.

      Best,

      Matt

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  • Yishmeray

    This really should not have been allowed to stand so long: “Theology, as I am sure you’re aware, in no way considers facts, evidence, or any semblance of science.”

    This is a patently ridiculous claim, however popular it may be.

    I apologize for answering in this manner. I would prefer to do so in direct discussion, face to face as it were. But the claims are here and deserve at least initial answer in the same venue.

    Later you wrote “…of which you require no evidence or proof, nor do you allow others to challenge this complete lack of empiricism…absolutely zero real facts.”

    I can imagine on your behalf, and in the kindest possible way, that you simply have not looked into this for yourself. Perhaps you have taken others’ words for it, following who knows what tortured logic to arrive at such conclusions. But it is all only imagining and conjecture.

    Not that your formulation (something like ‘poor benighted believers without truth or reason or logic or evidence, clinging to eminently disprovable opinions because of some mystical undemonstratable thing called faith’ vs ‘enlightened, wise, rational, logical modern minds whose sole province is science and truth and reality’) is in any way unique to you. Perhaps it gains some of its sway from the large numbers who adhere to it. Yet it fails to be demonstrated by any of them, however loudly and urgently it is asserted.

    Logic, reason, evidence, facts: all are strongly present within the realm of Christianity. We discuss and reason things out much as others do. We are acutely aware of our own limitations; we are also acutely aware of the limitations of science, so called.

    Time and space are not adequate here to demonstrate the unsupported nature of these ridiculous and baseless claims. And that is not needed, in this sense. Your claims require more than assertion. They require demonstration.

    Perhaps the best answer to all this is simply: “Prove it.” Or, as is so common among those who claim sole access to truth/right/reason/etc, I invite you to back up your claims with solid evidence.

    For a summary of some of the answers to your claims, I recommend “I don’t have enough faith to be an atheist.” (Turek and Geisler, 2004) The field of apologetics is awash with logical, reasoned, evidence-based answers – answers which give the lie to what you have so baldly claimed.