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Home Columns Economics and Business Forum

Economics and psychology

by Nation Online
02/09/2013
in Economics and Business Forum
3 min read
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It was at the end of the 1920s that John Maynard Keynes advised the would-be competent economists to be thoroughly versed in other branches of knowledge besides economics. In particular, he mentioned mathematics, sociology, psychology, history and philosophy.

In recent decades mathematics gained an upper hand in explaining economic data. With the advent of the 2007 to 2008 financial meltdown, economists began recommending the use of these branches of knowledge apart from mathematics, history was especially recommended. Here, we must recall how psychology has been employed in the past as a tool in understanding economic problems.

Psychology is the study of mind, attitude and behaviour. It has been used to understand how managers make decisions concerning employees and marketing of goods and services. They are often confronted with rival choices. While some problems can be expressed in quantitative terms, others cannot.

A manager must use judgement with psychology as one of his tools. How, for example, will other workers react if you promote someone who obviously is not the most competent and you do so because of the special relationship he has with you?

Firms use psychology when they show price of an article as 999 currency units instead of simply giving the price as 1 000. The latter makes the price look higher than the former yet the difference is insignificant. Some buyers do get hoodwinked, especially those who do impulse buying.

There is a term in economics called consumer sovereignty meaning that the consumer is king or queen that consumers are the final decision-makers on what to buy and not to buy. A businessperson who wants to succeed must, therefore, strive to know the preferences of his potential customers.

The term consumer sovereignty is sometimes an illusion. Businesspersons through their marketing and sales departments influence people to buy what they [businesspeople] want them to buy.

This they do through regular advertisements using famous personalities such as beautiful women footballers to reinforce the adverts. As a result of repetitive advertising, buyers stop thinking what to buy, they develop brand loyalty and keep buying the products they are used to instead of trying a new one.

Abraham Maslow, the psychologist, recognised five human needs and ranked them in ascending order thus (1) psychological needs for food and shelter (2) safety and security (3) belongingness (4) self and social esteem and (5) self- actualisation.

A person seeks to satisfy his psychological needs first before tackling other needs. Unless he has enough food to eat and shelter in which to protect himself from cold and wild animals as well as decent dress he gives little thought to other needs. You do not think of amusing yourself in dance or singing when your stomach is empty.

For government this policy observation is helpful. The government must first of all make sure that its people have enough food. Food security is the basis of other desirable activities. People will not bother about education, science or cultural activities if they are starving. To economic planners, Maslow the psychologist puts food security on the priority list.

Having satisfied people’s psychological needs, an economic planner is stupid if he or she thinks people will be contented with what they have. Actually, they want to fulfil other needs in the Maslovian hierarchy. Economic planning is a continuous journey; there is no question of resting on the laurels.

A country may be endowed with abundant resources of land, labour and capital (physical and infrastructure). Unless it has men and women to organise these into business, their presence will not bring about wealth. The person who organises these factors of production is called entrepreneur.

An entrepreneur is a risk bearer. In trying to organise these resources he may lose what he started with. He may start a business to make a profit, sometimes he gets bankrupt. Natural disasters may destroy; fire may burn down his products in the warehouse. There are all sorts of risks.

A country that is endowed with men and women with the entrepreneurial spirit is very lucky. It is out of such people you get founders of big companies and out of such group that we get prospectors for the miners that have brought wealth to a country. It is the entrepreneurs who went out of Europe to discover lands and eventually founded empire. An entrepreneur is an adventurer.

In Malawi, economic development has failed to accelerate because most people who take part in business are risk averse.

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