Oil Prices and 'Folk Economics'

By Rubin, Paul H. | Regulation, Summer 2006 | Go to article overview

Oil Prices and 'Folk Economics'


Rubin, Paul H., Regulation


As prices for gasoline increase and motorist-voters grow more angry, government is implementing or considering numerous counterproductive policies. The Wall Street Journal and other sources that understand fundamental economics have published several editorials and op-eds on this issue. They have pointed out that the price increase is due to the normal functioning of supply and demand in a situation where demand has increased, and that allowing the full functioning of the market will lead to increased supplies and other beneficial effects.

Nonetheless, consumers and voters do not understand this issue and the reaction of politicians is in response to pressures from voters. Gasoline prices peak every few years and voters are always irate. A standard response is to have the Federal Trade Commission investigate possibilities of collusion; after a few years of study by its Bureau of Economics, the FTC will announce that there was no wrongdoing. Additionally, Congress will subpoena industry executives to hearings where they will be castigated for high prices and high earnings. And the media will dutifully document the public's anger at "Big Oil."

Why do we have the same reaction from consumer-voters each time? To understand this reaction, it is necessary to go beyond simple economics and to consider the origin and nature of beliefs about economics--what has been called "folk economics." This requires consideration of the environment in which humans evolved and in which our intuitions about economics were formed.

Our instincts about economic issues were formed in the long period our ancestors spent as hunter-gathers. Humans have existed as humans for 50,000-100,000 years and our pre-human ancestors were around for millions of years before that. We have spent only about 10,000 years in settled communities. This is too short a time for much of an effect on our evolved preferences, so at some level we still have the instincts of hunter-gatherers. As Hayek has said, "Man's instincts were not made for the kinds of surroundings ... in which he now lives."

There were several important characteristics of the environment in which we evolved. It was highly static. There was virtually no technical change. (One authority refers to "major technical change" as a change in hand-axe construction over "a few thousand years.") There was little or no capital investment beyond s few simple tools, and a labor theory of value was appropriate. …

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