QUESTION: FEAR as a sort of multiplier

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    I am not sure this question exactly comes from your class, but it did come to me while listening to your discussion of chapter 4, the value of supply and demand analysis.

    It occurred to me that “emotion” (most specifically fear) must certainly play a major roll in how people value things….particularly money. (more specifically, in the future) When I refer to fear, I might be better off referring to it as uncertainly. In particular, uncertainly of future situations.

    I see this coming out when we see what people describe as the “wealth-effect” of a rising stock market….even though most people are not in the market, or at least are not taking current income from any gains they might have. (as most average persons gains if they have any are likely in a retirement account)

    But people seem to increase spending when they “feel things are good”…..and decrease spending (“save”) when they are not feeling so good.

    How do Austrian’s describe that phenomenon, and how does it factor into the economic calculation of the entrepreneur setting prices? (how does it affect their speculation…is that something that is not able to be calculated / considered?)

    I believe it is being considered (or should I say manipulated), and you can see it when the President or even the Central Bank will “jawbone” a promised policy and/or wax-poetically about a rising stock market, presumably to make people “feel good” and create a self-reinforcing wave of sentiment.

    How does this affect (get figured into) the economic calculation?


    PS: Upon further thought, I wanted to expand on what I mean by fear. It might be a worry of NOT being able to get something at all, or at a price desired, or in a timeframe required. eg: the delivery of water is just fine right now, fears of interruption of pipelines leads one to carry more in personal reserve than normal. (perhaps because of a past interruption, or maybe a terrorist bombing of water pipes in other parts of the country. )


    Economic theory concerns the logic structure of human action. It seeks to find the universal, causal laws of human action. The law of demand, for example, states that at a lower price for a good, the quantity demanded would have been at least as large as it actually was at the actual price at which the good was traded.

    Economic history adds to economic-theoretical knowledge, knowledge of contingent features of human action. Economic-theoretical knowledge is necessarily true while contingent knowledge is true in some cases but not in others. Fear is the latter. Sometimes human action is driven by fear, sometimes it is not. Some people are paralyzed by uncertainty, others thrive on it. Blending theoretical and contingent knowledge together into a full explanation of human action is economic history.

    An excellent example of economic history is Bob Higg’s insight about regime uncertainty in explaining the length of the Great Depression.


    I don’t mean to beat a dead horse, but just one more question….please feel free to ignore me.

    My title focuses on FEAR, but I guess I wonder how the more general affects of emotion
    are modeled in economic principles. Say in terms of a demand curve. (or even a supply curve when considering the emotion of the maker)

    I imagine that there is a particular product demand curve equation that emotion might push it in or out along the qty (x) axis depending upon how that emotion affects that person’s “feelings” about perhaps future availability or affordability of a good or perhaps just of another more valued good. I believe the “wealth affect” and any of the “calming” words used to make unexpected events seem “OK” are a play against emotions causing market uncertainly……but then, what you say about uncertainly causing some to get conservative, while others just start getting interested and step up to the challenge. (and the range of reaction is indeed wide)

    So the direct question is, how is individual or crowd emotion modeled / considered?

    Thanks for your patience with me…….I find the mentality of the mob, and work done to control and/or use and direct it to be fascinating.

    -Quentin (and I am sorry and admit to horse abuse)


    First, my apologies for the long delay in addressing your question. I just returned from a vacation without technology.

    In economic theories, economists try to discover cause and effect relationships within human action. Doing so requires stipulating a given state of mind of the person acting. The demand curve, for example, stipulates a given preference rank for the good relative to money in the mind of the buyer. Then the law of demand follows logically: only at some lower (higher) price would a person buy more (less) of a good than he actual buys at the market price, ceteris paribus.

    Economists are not so bold as to claim to be able to model the human mind, i.e., to have a theory of the cause and effect structure of the human mind itself. For example, how fear rises in a person’s mind. This is a question left to psychology.

    An economist who is trying to give an economic-historical (instead of an economic-theoretical) explanation of an event must rely on psychology to add to what can be know from economic theory.

    The classic work in this area is Ludwig von Mises’s book, Theory and History:


    First of all, thank you for the link to the Misis book Theory and History. I am in NH right now and traveling back to central Mass tonight, and I downloaded the audiobook version that I will begin to listen to on my way home. This will make the ride enjoyable.

    As for my comments on fear, I can appreciate what you say about the boundaries that economists feel they must operate in… stopping at the point where one begins delving into psychology seems like a perfect point of demarcation.

    Having said that, I will also say that I have gone back and am listening to this class a second time (again on my trips up and down between Ma and NH) and I think I can appreciate how one’s emotion can affect the future value speculation that might go on in both the entrepreneur (supplier) as well as in the consumer. (several hundred years ago, humans treated their crops with great care and went to great lengths to pickle/dry/preserve every bit of crop because this was it until the next harvest….unlike today where it is all readily available…..but that human nature to store and conserve would quickly come back if the conditions that existed back them did as well….and to a point even if people “believe” they might be coming)

    <soap box mounted>
    As an Electrical Engineer, I suppose I am a bit of a “bull in a china closet” in that I don’t always mentally color within the lines, mixing together/up and blurring the lines between scientific disciplines…..but then, I suppose I am not so much interested in pushing the boundaries of knowledge, as to understand the world so that I might survive and thrive in what might be a very uncertain future. <soap box mode off>

    BTW: Your explanation and treatment of the material is excellent. I really enjoy your care with in using the correct terms, and doing it so consistently that it makes my appreciation for the lessons so much better. (I myself use the english language in such an awkward and clumsy way, that I really appreciate your systematic and careful treatment. I also really enjoy your apparent interest in certain goods like Toyota Tundra trucks and Apple iPad products as you sprinkle references to them throughout many of your situation examples. I am not sure why that makes me smile, but I do enjoy it. Thank you for all that you do.


    I once again thank you for the pointer to the book….I did listen to about 7 chapters on my 3.5 hour ride back to home from Conway and this is definitely a book I would do better to read, or listen to with the ability to pause and re-listen. There were many moments I needed to stop and consider what he had just said….I needed to internalize it a lot more than I can with a straight listen.

    Anyways…thanks again for your suggestion, and all the time you put into this class and your responses here.

    -Quentin Lewis

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