First Principles

The term ‘first principles’ (ab initio) is primarily used in mathematics or, more pointedly, in differentiation (formerly calculus). It means the corner-stone or base proposition from which other hypotheses are derived. It is an irreducible truism. In modern speak the notion of first principles has transferred to other disciplines but the essence of its meaning remains intact – a foundation premise that is sacrosanct and upon which other assumptions may be lain.

The following is a deduction from formal logic – “Women are wily; Felicity is a woman; therefore, Felicity is wily”. But that is a syllogism. The last sentence may be construed from the other two. A true first principle is one that stands on its own merits and cannot be deduced from any other. I think therefore I am. Time is immemorial. E=mc². A child will always ask ‘why?’ I am responsible for the consequences of my actions.

There are first principles in economics too but they appear to be crumbling under the weight of persistent logic attacks. They should be irrefutable but….! Increasing money supply leads to inflation. Price is determined by the balance of demand and supply. Depressing currency prices increases the value of exports in that currency.

The difficulty with economics always has been and always will be its reliance on human behaviour. A first principle underlying many economic models is that, in the round, consumers behave rationally and will always chase down the optimal result. Sceptics forever took issue with this premise and modern technology elevates it to the status of myth. The effect of the internet and its app offshoots is that they provide more choice and better value than traditional retail channels. Therefore, consumers traipsing along to Dundrum et al are not behaving optimally. Under the same logic Amazon should have killed off all of the bookshops on the planet by now.

Hundreds of thousands of consumers did not apply for the recent water conservation grant of €100. Traditional economic models suggest that they should have. But the theory ignores those who have principled objections; those who could care less; those who are just lazy and those who have calculated that the cost in time taken to make the online application equates to more than the grant!

Modern technology with its penchant for providing informative up-to-date data is killing economic first principles. Academia can’t keep pace with the “new” behaviour of consumers. The hunter gatherer rules are no longer the fundamental building blocks. Guiding global millions out of poverty has changed the imperatives. Western consumers have much more choice and display wild illogicality in exercising it.

Economists need to understand this changed landscape and re-evaluate their thinking. Holding firm to dated first principles is undermining the credibility of their profession. The electorate often ridicules the political classes but politicians are clever at pampering to the masses and satisfying their demands – albeit based on demographics and electoral boundaries. Economists should fundamentally realign their thinking and provide fresh principles that reflect modern consumer behaviours.