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Basic Instincts - Pete Lunn ****

I don't know why it took so long to review this book - it has been on my shelf for a few years and now it's out of print. But I'm still reviewing it, because it should still be on the shelves. It's just possible that in that time it has become a little out of date... but I have a horrible suspicion that it hasn't. Pete Lunn (himself an economist) absolutely tears the guts out of traditional economics.

Although much of the central argument is also made in the excellent Economyths, there was more here I've never seen before.  What Lunn shows is so disastrous is the way that economics clings onto the bizarre idea that people always act in a way that is selfish, rational and based on perfect information. And what's particularly fascinating about this book is the way that Lunn shows that economics, which calls itself a science, behaves rather like the ancient Greeks often did - depending on a clash of theories, without ever doing any experiments to test those theories. The experimental side has primarily been left to psychologists and sociologists, while the economists simply ignore the results and plough on with their disastrous fiction regardless.

Lunn uses as a model a pair of imagined towns - Marketopia and Muddleton, showing how people would behave if they were as traditional economics portrayed them, compared with reality. He also relates how a few mavericks down the years have tried to get something closer to reality. How, for instance, in the 1930s an economist actually talked to business managers about how they made decisions, rather than basing his economic theory on models. He found there was no resemblance between what firms did and how economists assumed they behaved. For example, according to traditional economics, prices should be set by the market. In reality, businesses worked out their costs and added what they thought was an appropriate markup with very limited reference to the market. And yet, the ship of economics has sailed on regardless, driving the policies of governments and central banks, using these bizarre unreal models.

There is a small suggestion of change. Lunn shows us how some economists, for example, have at least challenged the 'perfect information' aspect and tried to see how not having perfect information would alter behaviour - but there is still primarily an assumption of selfish, 'rational' behaviour - where the economist's idea of 'rational' often simply isn't what human beings consider to be sensible.

It's not a perfect book. It's written more like a business book that a science book, which means taking a lot of lines of text to make fairly simple points. It's rather repetitious too. But Lunn has a warm, approachable style and you can forgive him for being a little dull, given the quality of the content.

Given this book has been around several years, the sad news seems to be that economists have still not got the message. Our economic advisors remain too dependent on traditional views of markets and on assuming people and companies will behave like the model, rather than researching how people and companies really behave and modifying the model to fit observation. It's arguable that this failure of economics is responsible for most of the economic mess we're in today, from the crash of 2008 to the rebellions of those who feel that the establishment doesn't care enough for them. We've been listening too much to conventional ancient Greek style economics and not enough to scientific economics. It's time for a change, and Lunn's book ought to give us a great lead in that. But somehow, I doubt it will.

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Review by Brian Clegg

Comments

  1. THE book on this is surely Kahneman, Thinking Fast and Slow. In a delightful example of self-reference, Kahneman, having got the Nobel Memorial prize in economics for showing that people don't act on rational self-interest, gave nearly all the money away.

    Morningstar gives extra credit to companies that avoid traditional competition-based market economics altogether, by building a moat based on their special position.

    And increasingly, we have major players (from Amazon to Uber) who makes their money by inserting themselves between supplier and consumer.

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