In a post a few weeks ago (here) I mentioned that economists generally aren’t very much interested in what people have to say. You won’t find many economic researchers engaged in constructing focus groups, and asking people for their opinions on the labour market, the state of the financial system, or why they think the government (or they themselves) can’t balance a budget. Usually instead, economists collect data about what people bought, what they were paid as wages or who they voted for. When I mentioned this previously, I also said that there were very good reasons for this. As I have attempted to explain before, economics is not the study of money; it is the study of the efficient allocation of scarce resources; from a single household to the whole country. How each individual allocates these resources in his/her life is based on his/her individual preferences, subject to his/her budget constraint.
The thing about preferences however, is that they can be very elusive, even to the individual themselves. You don’t really know how the cash in your wallet is going to be spent. If you were asked, you would possibly think of food shopping or other basic survival necessities. This is how we like to think of ourselves, as functioning people surviving in (and possibly even contributing to) society. Most likely that money won’t be spent on standard food shopping, most likely it will be spent on something stupid like a magazine, luxury baked goods or five beers. What we have here is the difference between a stated preference and a revealed preference. The stated preference was for the food, but through your actions your revealed preferences are for basically everything else. As mentioned in a few previous posts, social sciences don’t really tell you anything you don’t know intuitively, and the lesson here is that there is a fundamental difference between what we say and what we do. In neo-classical economics, only revealed preferences are taken into account, as what people do is far more relevant to the efficient allocation of resources than what they say.
In order to study these revealed preferences, some kind of medium is needed in order to isolate the talking from the action. Nothing suggests a preference for something as much as willingly spending money on it, so therefore we have a logical area to research: the free market. In simple economic theory, buying something is taken as a revealed preference for that item. Each purchase in a market economy is a signal, revealing preference after preference. Supply and demand for each product interact in accordance with these revealed preferences, setting the prices, setting trends and defining what is available for consumption in the economy as a whole. In essence, money is used to quantify what we really want in life, based on signals we give to people who make the products we buy. This is one of the reasons why the concept of money is so important in economics. This might seem very depressing, and not many will want to believe it, but in social sciences simplicity is the key. The free market is the one medium where all members of society must interact at one point or another, and is thus the best way possible to quantify these revealed preferences. Asking people what they want would probably not yield the same quality of results.
This is not that people are generally dishonest or liars, it is just that sometimes we want something we say to represent who we are. In May 2010, the UK media were going crazy as polls they conducted indicated that the Liberal Democrats would storm into power, based on positive reaction to Nick Clegg in election debates. The LibDems did well in the election, and went on to form a coalition government, but the difference between the media polls and the actual results were incomparable. In between the debates and the election, newspapers such as The Guardian randomly asked people on the street who they were going to vote for. Most voters in a two-party system are sick to death of the usual suspects up for election, and Clegg was something new, something exciting, so they answered for him. Actually voting is another matter entirely, as most don’t want to waste a vote on a third-party candidate when they know that one of the usual suspects will win. Really all that the individuals who were polled were doing was trying to impress a stranger, the stranger who was polling them. Nick Clegg and the LibDems were exciting and different, and so were the people answering the poll questions. In 2008, John McCain thought he had a chance in the election despite the massive deficits he suffered in opinion polls, as he was advised (with good reason) that people favoured Obama in polls as they didn’t want the polltaker to think he/she was a racist. In the US, the overestimation in polling numbers for minority candidates is so prevelant that it even has a name, The Bradley Effect.
What we say and what we do are very different things. The things we say are our direct outlet to show the world what kind of person we think we are. Everyone has an image of themselves, and we are not all aware of it. We just suffer from a kind of existential crisis every time someone asks us what we think about something. What do I think? Who am I? Who do I want to be? Who is this person? Do they like me? With friends and people we know well, this is different of course. With strangers, most people will want to portray the best possible image of themselves. It is the difference between public thoughts and private thoughts. You are more likely to reveal your true self to your close friends. You won’t pretend to like opera, you might confess that your designer bag is a fake, and you just might let it slip that you actually do think Justin Beiber is a great musician. Most people have things like this that they will only tell to close friends, and would never reveal to someone they just met. In economics, we try to take all of this this into account. I have been told on good authority that the word “idiot” comes from the Ancient Greek word for “private person”, and what we can take from all of this is that in private, we are all really idiots. We just don’t want many people to know about it since that, in itself, would be a revelation.