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1. The domain of folk-economic beliefs
1.1. What folk-economic beliefs are
The term folk-economic beliefs denotes a large domain of explicit, widespread beliefs, to do with economic and policy issues, held by individuals without systematic training in economic theory. These beliefs include mental representations of economic topics as diverse as tariffs, rents, prices, unemployment, and welfare or immigration policies, as well as mental models of interactions between different economic processes, for example, inflation and unemployment.
Our perspective on the origins and forms of folk-economics is based on two major assumptions. First, we argue that folk-notions of the economy should not be described solely in terms of deviations from normative economic theory. That has, unfortunately, been the common approach to the subject. Folk-views are generally described as the outcome of “biases,” “fallacies,” or straightforward ignorance. But describing how human cognition fails to work according to some norm of rationality tells us little about how it actually works. Second, we propose to make sense of folk-economic beliefs by considering the environment in which many, if not most, human cognitive mechanisms evolved.
The study of folk-economic beliefs should be distinguished from other domains of investigation. Microeconomics addresses actual choices of agents in conditions of scarcity, independently of whatever mental representations trigger these behaviors in actual individuals, and also of the representations they may form of their behavior upon reflection. Another field, behavioral economics often uses experimental designs as a way to elucidate tacit motivations and capacities that direct economic choices in contexts where experimenters can manipulate incentives and information flow between agents (Plott 1974; Smith 1976). Finally, neuro-economics elucidates the brain systems involved in appraising utility and making economic decisions (Camerer et al. 2007; Loewenstein et al. 2008).
The scope of a study of folk-economics is quite different from these three fields (see Figure 1). It focuses on people's deliberate, explicit beliefs concerning economic facts and processes, for example, that foreign prosperity is good or bad for one's own nation, that welfare programs are necessary or redundant, that minimal wages help or hurt the poor, and that rent controls make prices go down or up, and so forth.
One should not assume that folk-economic beliefs (henceforth FEBs) have direct and coherent effects on actual economic behaviors. Many FEBs...