Nietzschean Economics

Nietzsche described the universe as the manifestation of an underlying force which he called will to power. For him, an “insatiable desire to manifest power” is the essence of the universe, and all living things have the same goal, growth. He wrote: “every living thing does everything it can not to preserve itself but to become more.” And to grow and expand, individuals establish for themselves lofty goals that they will (probably) never reach. Aiming high requires overwhelming efforts and the willingness to “risk every danger”. Pain, suffering, and being thwarted in one’s attempts to accomplish a goal are the preconditions for growth and hence an increase in one’s power. [Link to the book] 

I have always been fascinated by this idea that individuals are living in a constant desire of self overcoming and yesterday I had the chance to read an interesting debate between Richard Robb and James Heckman. In three articles (see below) they discuss if will to power is compatible with our rational choice theory.

Robb claims that economic models cannot incorporate the Nietzschean concepts and give some examples of individuals getting “utility” not only from the output of an activity but also from the exploration and the effort exerted in that activity. Agents have a “preference” for struggling. For instance, if people go to the gym, if they suffer below cold metallic machines, and they feel pain in all the parts of their bodies is not (only) because they expect a health benefit in the long run, but because they enjoy the experience. Robb also discusses the unconscious nature of human motives and the capacity of humans to rationalize the consequences of choices after a choice is made.

Heckman replied by showing how “overcoming” might be incorporated into standard utility functions and challenge Robb asking what may be the benefit for economics from investigation into the motives underlying human action.

 

 


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The Pareto Principle

The Pareto principle (or the 80/20 rule) says that roughly 80% of the effects come from 20% of the causes. This principle got its name from the Italian economist Vilfredo Pareto, who showed that in 1906 approximately 80% of the land in Italy was owned by 20% of the population. He then carried out surveys on a variety of other countries and found to his surprise that a similar distribution applied.

Many natural and social phenomena follow a Pareto distribution. For instance, 20% of the pea pods produce approximately 80% of the peas, 20% of drivers cause 80% of all traffic accidents, 20% of patients use 80% of health care resources, 20% of criminals commit 80% of crimes, and 20% of infected individuals are responsible for 80% of transmissions of contagious diseases. We can observe this rule even in our daily life: we wear 20% of clothes 80% of times, 20% of items in our cart amounts to 80% total grocery bill, we use 80% of the times 20% of the apps in our smart phones and tablets.

The value of the Pareto Principle is in reminding us to stay focused on the 20 percent that matters. Of all the tasks performed throughout the day, only 20 percent really matter.

In the book 80/20 Principle (Link), you can read more about the Pareto Principle and its applications. There are interesting stories and ideas for applications from life to business. I love this principle because it forces you to reflect about your life and what you do daily. You may realize you are wasting your time in activities that are not productive, important or fun. You can start by finding out what those 80% activities are for you, and what are the other 20% of activities that produce 80% of your result, happiness and meaning. Once you have done this, double down on those efforts as much as possible and then repeat the process.


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The Law of the Hammer

Abraham Maslow in his book The Psychology of Science (1966) wrote “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail”.

The law of the hammer is a cognitive bias that involves an over-reliance on a familiar tool. For example, when you learn a new economic concept you may apply it everywhere – which may result in failure to seek out other (potentially more efficient) alternatives.

The concept is attributed both to Maslow and to Abraham Kaplan although the hammer and nail line may not be original to either of them (or more information read here).

Charlie Munger in Poor Charlie’s Almanack (2005) [Link] wrote that one partial cure for the law of the hammer is multidisciplinarity. If a man has a vast set of skills over multiple disciplines, he, by definition, carries multiple tools and, therefore, will limit bad cognitive effects from man-with-a-hammer tendency.  In other words, single disciplines are too narrow a perspective regarding many phenomena. The world in which we live in exhibits a level of complexity that makes it impossible to understand the important phenomena that are affecting humans today from the perspective of any single incomplete system of thought.

In short, the mere knowledge from only one domain, is not enough. To be wise, you must develop a true curiosity to read different streams of literature and constantly learn new perspectives of the world.

To know more: read the introduction of The Nature and Method of Economic Sciences: Evidence, Causality, and Ends by R. F. Crespo (2020) [Link].


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