Economics and psychology
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.
Interesting analysis and well argued. Thought provoking. I would add manufacturing engineering to the list of complimentary skills for economists especially in developing nations. The reason is for better understanding of the production function which in my view is the central bridge that links economic/econometric/mathematical analysis to the real world economic transaction activities and growth. If we can digress and indulge in some intellectual treatise feast on the side here, I propose that existing economic production functions (such as CD or CES) are inadequate to explain determinants of growth because they are restricted to labour-capital-technology factors. Moreover, when asked to expand on the “technology factors” econometricians just shrug their shoulders and declare the factors merely as stochastic variables. In order to explain Malawi’s lacklustre economic growth we need a deterministic parameter -driven production function that combines “allocative” and “technical” efficiencies. We cannot rely on stochastic (probabilistic) assumptions when deterministic alternatives are available. As for labour contribution to production, unfortunately the worldwide subject matter analysis is stuck in the old classical thinking that more labour produces more output. Not true in a mechanised production where machines are used. If 1 driver can till 10 hectares of land in a day with a tractor, how many more hectares will 1000 drivers till in a day using the tractor? None they do not have a tractor so they are reduced to spectator status as one driver toils away. Work output (and hence productivity) is controlled by the machine capacity not by the number of labour (drivers).
The argument about entrepreneurship is novel. Is it really the cause of under development in Malawi? Hirschman has used it extensively to push his unbalanced growth line that developing countries are poor because of lack entrepreneurs. When I travel up and down Malawi empirical evidence on the ground suggests otherwise. There are thousands of handcraft entrepreneurs, tomato/banana sellers at the bottom end. Practically every civil servant has a side business of one form or another. So the question should be why are our entrepreneurs limited to these petty industries such as minibuses. Surely one contributing factor is lack of capital or expensive capital that stops these budding entrepreneurs from graduating to corporations. Financial reform to cut lending rates to below 10% can go a long way to stimulate growth in this country. This is not a hypothetical wish list. The Us Federal Reserve has established that a 0.1% cut in long- term interest rates generates $100bn of economic activities! RBM is stuck on 25%, how does that stimulate investment and support business survivability? Inflation is over 27%. Maybe our UK former governor Dr King can help to usher in new banking procedures and low rate regime. Otherwise investment borrowing is like drinking a poisoned chalice. You borrow at your own survival risk. Malawi is 2nd worst in the world in lending rates up there with disorganised and failed states.
http://www.indexmundi.com/facts/indicators/FR.INR.LEND/rankings
If Ethiopia can cut its lending rates to 8% and achieve a boom, don’t tell me that Malawi can’t.
Having said that let me emphasise that the overriding reason Malawi is underdeveloped is not due to witchcraft, nor God’s anger against the nation, not corruption (this will surprise many but China and South Korea developed in spite of), not HIV/Malaria, not cultural, not lack of democracy, not low education level (another surprise to many) nor any other causes. The reason Malawi is poor is due to lack of industrialisation!!! The answer is not small scale welding in Limbe, Biwi, Neno, Dowa, Makanjila, Nasawa, Katoto or Bolero nor agribusinesses in rural areas. We need world-class manufacturing to trigger untold wealth creation and to advance the country forward in GDP growth and millions job creation. Malawians we can do this, politicians please facilitate!