Economic Myopia

One of the first articles I read as part of the Marketing Management course curriculum at IIMB was ‘Marketing Myopia’ an HBS article written in 1960 by Theodore Levitt. An influential article in its time it suitably impressed the novice me as well. The theme of the article is that companies should look beyond the obvious (their existing narrowly defined markets) and look for more opportunities by looking ahead in future and defining the markets as broadly as possible.

Being a student of Austrian Economics I was amused that the idea of looking beyond the obvious while readily accepted by the Marketing profession was shunned by the entire economist community (aren’t we all Keynesians) when in fact the idea was conceived much earlier in the field of economics (http://en.wikisource.org/wiki/That_Which_Is_Seen,_and_That_Which_Is_Not_Seen)

Almost all the post mortem analyses of boom and bust cycles are focused on the asset class where the bubble burst, despite the fact that in each boom and burst situation it was a different asset class which tanked. There is no problem with such analysis, if and only if it is seen as a starting point. But without exception most of the economic commentators stop short at understanding the reasons why the particular asset class suffered (CDOs/Tech Stocks/Emerging Market Bonds/Oil etc) or even worse why a particular financial institution sank #.

Such concretization is not very useful as there are thousands of asset classes (and new financial instruments keep emerging) and if the economists keep their understanding limited to what went wrong with a particular asset class at a particular point of time in history the realisation that had it not been mortgages, the cheap money would have found its way to create some other asset bubble would never dawn upon them.

What is the solution to this economic myopia? The traditional and boring one is to think in terms of abstracts, which I think is a bit difficult because “theory is not really tangible and concrete”. I am tempted to add how much I hate such proud platitudes as “economics is all gas; you need to look at the real data” and why concretized thinking is the core problem in economics, but I will not.

A more colorful solution and this comes from a person who himself doesn’t believe much in economic theory but despite his ignorance of economic theory he is still to an extent immune to economic myopia because of his habit of visualizing ‘alternative histories’, the habit of not looking at a ‘realized outcome’ without reference to the ‘unrealized outcomes’.

But again, colorful as it may seem his is not the best way to prevent economic myopia. Precisely because there is no enquiry into the underlying factors which lead to the one ‘realised outcome’, the fact that he doesn’t proceed any further, choosing rather to label the ‘generator’ unfathomable. I guess the reason is his nihilistic approach to acquisition of new knowledge, his popperian view of the world.

# I however do concede that such specific enquiries into the causes of busts have a certain value, the same value that reading history has. Barnett Hart’s thesis on the failure of CDOs is the most coherent historical account of the 2007 depression that I have come across so far - http://www.hks.harvard.edu/m-rcbg/students/dunlop/2009-CDOmeltdown.pdf