Well, in the article I caricatured how economists look at preference. So, let me do it in two stages. First, the way economists usually look at preferences is that we say preferences are rational. Now, all rational means is complete and transitive. Transitive means that you can’t trade things for me and then have me want something else. Complete means that I can make a choice between any… two alternatives. There are apples and broccoli and carrots: I can make a choice between any of those. I don’t say I don’t know.
That was Mike Munger on the EconTalk podcast. That assumption about economic agents doesn’t seem particularly realistic, and the rest of the episode is devoted to picking apart the usefulness of a rational preference framework.
And yet, such a framework remains at the heart of the Pentagon’s acquisition process. We have “consumers,” or military users, which define their preferences in terms of a prioritization of requirements which results in “indifference curves”. Then we have cost accounting data matched with various production processes creating our “production possibilities frontier.” Optimizing across various product specifications given the constraints provides the solution set. It’s all a nice engineering problem.
In a very real way, the PPBS was introduced by Robert McNamara and his whiz kids into the Pentagon explicitly for the purpose of making decisions in this manner — according to neoclassical economics and basic concepts of linear programming. Ideas have consequences, and those consequences have been devastating to the United States military. Of course, that’s my opinion because it I can’t prove a counterfactual, but obviously no business runs itself in this manner.
While the construct may have some academic utility to say the system works “as if” people have well-defined preferences, it does not have any place in business decisions. We wouldn’t know Steve Jobs’ name if he relied on the consumer telling him what to build. It is not happenstance that no company runs itself in this rational calculus and pricing framework — for if they did they would soon find themselves out competed by the more agile processes that focus on learning and becoming — not static analysis of what is.
Here’s a bit more from Hayek Program Podcast with Richard Wagner talking about his book, “Macroeconomics as Systems Theory.”
This book is really a meditation on the old theme that ideas have consequences. Ideas are not neutral things, they’re not like microscopes. They can’t just see things more closely or demagnify, they can also see things that aren’t there, or to look in the wrong places.
… How do we conceptualize an idea of an economic system? The usual conception is this circular flow model, which is a kind of aggregate — an accounting construction of society. But yet if the fundamental feature of all economic activity is planning, where every act involves a passing of time because you decide to do something the consequences of which won’t manifest until some later time. In that interval between the time of deciding to do something and the time when consequences begin to manifest, there are other plans that also come into play which for better or worse impact the expected performance of the plans.
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