- Environment: Objective factors to economic decision making. These are the “nouns” of economic action.
- Incentives: Subjective evaluation of the expected outcomes attainable through action.
- Behavior: The objective action taken by an individual, the “verb” of economic action.
- Welfare: Subjective and reflective evaluation of the condition of the actor
The purpose of this article is to reformulate the abstract analysis paradigm that was needlessly complicated by introducing social norms, technology, feedbacks and potential government functions to the stream of economic decision making. What started in Law and Economics as ΔL ->Δ I -> ΔB -> ΔP morphed into a hodge-podge of cooperating and conflicting forces that each influenced different levels of the stream in different ways. This resulted in a conflict between schools of thought where no conflict is theoretically necessary. Instead of social norms being a separate factor from law on the incentives of acting individuals, they are each interacting pieces of a larger extra-actor Environment.
To accommodate this conflict, and to address the a la carte feedback loops introduced to further analyze economic behavior, a new paradigm needed to be introduced to better conceptualize the decision making process. Additionally I have replaced the nebulously defined “economic performance” terminus with a more clear term, welfare. Economic performance, as an abstract label for the result of economic action, does not clearly define what is being measured. Further, by using the word “performance,” it is unclear if the term relates to some action or some physical state of affairs. Neither of these definitions truly capture the output of economic action however, as only the individual actor can evaluate whether his actions have benefited himself, and to what extent they have done so. Thus I have substituted the term “welfare” into the former terminus to denote how the actor perceives his current (post action) economic performance.
Lastly I have formalized how each category of decision making relates to the others in a non-linear relationship to eliminate the feedback loops. The original path is preserved in the new formulation below as the green arrows, but new arrows are introduced to exhaustively illustrate the other driving forces in economic decision making. First, an actor’s behavior not only influences his subjective welfare, but also must affect the physical environment. Second, changes in the Environment of an actor may directly affect his welfare without inducing any change in incentives or behavior of an actor (e.g. a neighbor to an individual trims a tree, allowing the latter individual better enjoyment of the sun while going about the same daily routine he otherwise would have undertaken). Lastly it must be recognized that a change in an actor’s welfare will also cause a change in incentives for the actor.
Note also that none of these relationships run backward. The change in the Environment of an actor never directly induces a change in Behavior of the actor. If a tree fell on an individual and knocked him to the ground, no economic behavior was undertaken by the actor. Instead the tree gave the actor a new set of incentives: if he wishes to continue with his previous plans he must then stand back up. Movement and the physical activity of an actor are not themselves economic behaviors, only chosen actions can be called economic behaviors. Likewise a change in the subjective welfare of an individual can not directly affect the Environment of the actor, it can only create incentives to induce a behavior in the actor to change the Environment.