Economics and Resolutions

John Maynard Keynes, perhaps the most influential 20th century economist, once wrote that economics “is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions.” In other words, economics offers principles to help us make fewer mistakes.

Given that many make New Year’s resolutions in an effort to improve their lives, it is worth considering some economics principles that provide to aid that effort.

Economics does not provide everything necessary for wise choices. It does not provide the required facts or judgments. In fact, pervasive uncertainty means it does not generally tell us the “right” choice, since different options will turn out to be best in different circumstances. Rather, its principles typically teach about mistakes to avoid.

Economics can be defined as the study of the consequences of scarcity—what we desire (including for others we care about) will always exceed what we can produce.

One implication is that whenever resolutions are based in the belief that some change, say, a higher income, will eliminate scarcity’s limitations, they are misguided. As long-time host of the Tonight Show Johnny Carson once quipped, “Having more money doesn’t mean having fewer problems; the problems just have more zeros after the dollar sign.” Further, while we can determine our actions, we cannot determine our feelings. Consequently, resolutions about how we will feel are largely futile attempts to control the uncontrollable. For instance, when we resolve to fix everything about ourselves at once, we follow a recipe for failure and discouragement, rather than improvement.

Another definition of economics is the study of people’s choices made necessary by scarcity. Consequently, knowing what choices are faced and who has the power to make them are crucial to effective choices, including resolutions.

First, we must remember that choosing is unavoidable. Even changing nothing is choosing the status quo over alternatives. Further, each of us decides our own actions, making “I had no choice” an invalid excuse. Yet we can choose only what we do, not what we feel, making resolutions about our feelings efforts to control the uncontrollable. We must also remember that we cannot determine choices actually made by others. The only persons we can ultimately improve are ourselves. We can become more likeable, but we can’t make someone like us. We can resist giving offense, but cannot assure that no offense will be taken. We can work to become more successful, but our efforts alone do not determine results.

Choices we make now also affect only the present and the future. They cannot change the past. Yet acting as if the past will be changed by current choices is so common that economists have a name for it—the sunk cost fallacy. For example, many overwhelm themselves with guilt about their past and give up. Other people get so tunnel-visioned about the past that they sacrifice their present and future in a futile effort to unmake the past or to avenge previous wrongs that cannot be changed.

Since we can change only the present and future, resolutions must focus there. For instance, we can apologize, forgive, and begin to make past wrongs right now. Letting the past stop such actions is simply making another mistake. And we must look to future consequences of our actions, as well. Living more in the moment can be an antidote to sacrificing current happiness to invest everything in hopes of a better future, but it is also a mistake to “just live for today,” when today has important consequences for tomorrow. Further, it reminds us that New Year’s is not the only time self-reflection can improve our lives—qqqevery day presents a new beginning, when past failures need not control us.

Since choosing entails giving up something else valuable to us, every choice has an opportunity cost, which economics defines as the highest-valued alternative given up by the decision-maker. This implies that few choices are correct indefinitely, as the relevant costs change with circumstances. It also explains why perfectionism is a curse when it involves becoming better and better at one thing, while sacrificing improvement in every other area.

Since most choices are not all-or-nothing but rather are about whether to do more or less of something, starting from one’s current circumstances, economics focuses on marginal choices. Yet we resolve to always or never do things. But in troublesome areas for us, lapses are almost certain. That sets us up to quit as soon as we first falter, short-circuiting chances for success.

Economics has other “cognitive therapy” insights to offer resolution-makers. But these illustrate economics’ power beyond where most recognize it, pointing to much broader applications to what Alfred Marshall, the world’s leading economist at the turn of the 20th century, called “mankind in the ordinary business of life.”

Aristotle said “an unexamined life is not worth living.” Economic principles help make that examination more useful.

Gary M. Galles is a Research Fellow at the Independent Institute, Professor of Economics at Pepperdine University, and Adjunct Scholar at the Ludwig von Mises Institute.
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