Unhappiness and Unemployment - Term Paper Example

Economic psychology This research paper is focused on connection of Obama’s proposals and neo ical economics. On the basis of this connection, a conclusion about Obama’s irrational behavior is made. Consequently, this research paper discusses the nature of irrational behavior in economics with regard to current and old behavioral theories in economics. Moreover, there is an attempt to continue this kind of research and conduct another study of a broader context. In the discussed situation, a difference between rational and irrational behavior in economics was shown. The main claims of Leon Walras and J.M. Keynes as representatives of neoclassical economic proposition provide readers with two basic concepts explaining irrational behavior in economics. In accordance with Walras ‘additive utility function’ means the utility of a bundle of goods, i.e. pleasure through consumption of each good in the bundle. In accordance with Keynes: “in the absence of borrowing and investment spending, there is no economic impetus to expand or grow the economy”. The following consequences such as massive unemployment; a spiral of contraction caused by lack of contraction because of lack of on capital equipment expenses; ambiguous environment in which private investment is not sufficient to restore economic decline may occur (cited from PPT presentation). Consequently, Keynes suggests the following solution: the government should employ the unemployed to provide them with a certain income thus increasing ‘the buying power’ that leads to a greater level of consumption, business expansion and private investment renovation. This theoretical synopsis is further discussed with regard to Barack Obama’s Economic Proposal Trio: “the first measure taken by Obama is that businesses should deduct the full cost of investment against their taxes next year (2011) instead of over three or more years; make a tax credit for research and development permanent; a launch of six-year transport bill, while proposing that $50 billion be spent right away rebuilding 150,000 miles of roads, 4,000 miles of rail and 150 miles of runway” (cited from PPT presentation). In such a way, Obama’s proposal can have the following impacts: low interest rates (which reduce the value of an early tax repayment) and the fact that businesses are more focused on weak demand than their cost of capital; Making the R&D credit permanent cost $100 billion over ten years but this is only $30 billion more than if the credit were simply renewed every year. Consequently it is possible to claim that Obama’s Proposals would lead to public disapproval of his politics. Obama’s Proposals are developed in accordance with neoclassical principles of economics. In spite of the fact that current economical Trio offered by Obama’s Team is strictly criticized, there is a chance to restore public confidence in his politics. Generally speaking, Obama’s Proposals lead to maintaining a neoclassical economic goal that: ‘one can improve his/her well-being through increased income to acquire more1possessions’ (cited PPT presentation). The concept of ‘an increased income’ can be approved for sure by the American society. Unlike Obama’s team, the main beliefs of the society are more subjective and individualistic than those of Obama’s government. Economic Proposals of Obama concern all social spheres of human life and increase the income of the society in order to reach greater well-being. The main problem occurring on the basis of Obama’s proposals is not to let happiness be focused on materialistic aspect of nature only. His supporters underline his practical decision-making and his opponents claim that materialistic aspect of human life is not a core issue of happiness. Unlike Obama’s beliefs, in accordance with a detached point of view it is possible to claim that human happiness in the modern society is possible only in case of materialistic well-being. As far as we can see, Obama’s Proposals are in contradiction with traditional economic theories. It is necessary to underline that his irrational beliefs concern materialistic happiness of the American society; thus Obama came to the conclusion that no forms of materialistic beliefs from generally accepted economical theories are applicable for reaching constant happiness and pleasure of his people. In accordance with the mainstream economic theories, individuals, actively involved in economics should behave rationally. Obama took reverse political course and turned his attention to non-rational/irrational behavior in economics. The neoclassical paradigm discards rational behavior in economics. Decision-making in neoclassical paradigm is often made in accordance with the rule of thumb or other alternative decision-making theories. The models of irrational behavior complement neoclassical models. In order to discuss possible ways of irrational models’ application in economics and politics, it is relevant to discuss our understanding of private decision- making and public attitude to this kind of behavior. Obama’s Proposals may be discussed in the paradigm of neoclassical producer theory: he makes an emphasis on maximization of profits; ‘more is better’ is the motto of his politics. Conservatives are against Obama. They scatter off his politics. But is it fair? Banks were saved from bankruptcy; people get paid back for their tax dollar bailouts; stock market is developing; levels of unemployment are decreased from 700,000 in January 2009, to 20,000 in January in 2010. Moreover, it is necessary to underline that constant economic growth, great care about security and health care issues are in the main focus of Obama’s team. Therefore in spite of the fact that irrational economic behavior of Obama is not approved by conservatives and public, positive results of his politics can’t be underestimated. In such a way, it is relevant to pay a great attention to Obama’s politics as extraordinary but efficient one. Rational behavior is not applicable for Obama’s politics, because rationality as utility maximization is logically weak and empirically unacceptable. This can be explained by the following reason: rational behavior evokes the erroneous belief of sociological reductionism by disintegrating “all types of social action, including rational conduct, into instrumental behavior directed on utility maximization” (Clark & Oswald, 1994). Rational behavior should be expanded to an “open theory of rationality rather than the special [closed] figure of rationality used by [rational choice theory]” (Clark & Oswald, 1994). Irrational behavior is the result of expanded rational behavior; it’s a form of “non-rational choice theory dimensions of rationality”. Irrational behavior is nothing more than transcended economic rationality. Neoclassical economics is in the center of irrational behavior though it is extended and complemented by different economical, psychological and other factors. Public disregard to Obama’s policy and conservatives’ hostile attitude to his politics may be explained by the fact that irrational behavior is less known to the public. Nevertheless, irrational behavior is not necessarily less methodologically legal than rational one. Moreover, irrational behavior is accepted and justified in terms of economics. Ontological legitimacy of irrational behavioral models is not less sound or logical than rational ones. Obama’s political course directed on increase of taxes, limitations of small businesses to hire more people; high energetic expenditures through Cap and Trade and not giving small negatively influence on the society. FDR and the New Deal were of the main focus for Obama. Further clarifications of Obama’s Proposals may be clarified in accordance with Stigler (1965) who claims that economic theories should be considered in accordance with three parameters: congruence with reality, generality, and tractability. Obama’s Proposals partially comply with these parameters. On the one hand, the supporters claim that figures provided by Obama’s government are unrealistic. On the other hand, it is evident that some positive results are reached. Consequently, in the basis of his proposals were realistic assumptions which resulted in realistic predictions. Moreover, in accordance with Adam Smith, who said that “we suffer more... when we fall from a better to a worse situation, than we ever enjoy when we rise from a worse to a better.” This great economist invented the term ‘loss aversion’. He also noted dualistic nature of people’s attitude to equal utilities (Camerer, 1992). Therefore Obama’s proposals are contradictive in their nature thus causing controversies among public. Irrational behavior is worse perceived than rational behavior. This is a social stereotype: irrational economic behavior is uncommon for economics thus the society can’t get used to irrational models of economic development. In accordance with other modern behavioral theories, it is relevant to refer to the study of ‘hedonics’ (e.g. Kahneman, Diener, & Schwartz, 1999; Loewenstein, 1998). Hedonics considers the notion ‘utility’ in a broader context. Let us remember that in the neoclassical view: “utility is simply a number that codifies an expressed preference (“decision utility”). Such concepts as ‘forecasted utility’, ‘remembered utility’, ‘instant utility’ occur in hedonics. The difference between ‘forecasted utility’ and ‘instant utility’ is in a different attitude to these utilities in a course of time. For example, currently, Obama’s Proposals cause negative responses among the society. With the course of time it is evident that utilities are changed and current politics may be considered from another positive point of view. Consequently, future is biased with regard to instant utility. Moreover, hedonics also measure happiness with the help of economic measures. In the early works on economic behavior, Easterlin (1974) underlined connection between income growth and happiness rate. If to project this theory on current policy of Obama’s government, it is can be clearly seen that in spite of statistical figures, there is no income growth in the society otherwise Obama’s Proposals would be accepted and appreciated by the society (Frey & Stutzer, 2002). Therefore it is relevant to suggest topic for the following research. It is possible to consider Obama’s proposals in the paradigm of hedonics theory. On the background of the given theory it would be clearly seen whether a broader context of Obama’s proposals can be applied to it. Therefore public reactions to Obama’s politics should be focused not on every aspect separately, but should concern the whole politics, proposals and innovations in general. In such a way disregard among the society could be scattered off and Obama’s irrational behavior could be considered an innovative and efficient one. In one way or another, such kind of research can be made on the basis of quantitative methods involving questionnaires filled in by several randomly chosen representatives from different layers of the society. In the result of potential study it can be clarified whether Obama’s Proposals reflecting irrational behavior can be considered and discussed separately or it is more relevant to apply hedonics theory and consider his politics in general. There is no doubt that his politics makes an emphasis on maximization of utility; it is just necessary to clarify a broader context of utility. Therefore relevance of further research is evident: a broader context of ‘utility’ consideration allows making an analysis of Obama’s proposals multi-sided and evident. Works cited 1. Camerer, C. F. (1992). Recent tests of generalized utility theories. In W. Edwards (Ed.), Utility theories: Measurement and applications (pp. 207-251). Cambridge: Cambridge University Press. 2. Clark, A. E. & Oswald, A. J. (1994). Unhappiness and unemployment. Economic Journal 104(424), 648-659. 3. Easterlin, R. A. (1974). Does economic growth improve the human lot? Some empirical evidence. In: P. A. David & M. W. Reder (eds), Nations and households in economic growth: Essays in honor of Moses Abramowitz (89-125). New York: Academic Press. 4. Frey, B. S. & Stutzer, A. (2002). What can economists learn from happiness research. Journal of Economic Literature, XL, 402-435. 5. Kahneman, D., Diener, E. & Schwarz, N. (eds.) (1999). Well-being: The foundations of hedonic psychology. New York: Russell Sage Foundation Press. 6. Loewenstein, G. (1996). Out of control: visceral influences on behavior. Organizational Behavior and Human Decision Processes, 65, 272-92. 7. Quiggin, J. (1993). Generalized expected utility theory: The rank-dependent expected utility model. Amsterdam: Kluwer-Nijhoff. 8. Stigler G. (1965). The development of utility theory. Chap. 5 in Essays in the History of Economics. Chicago: University of Chicago Press. Read More