Making sense of the strikingly different ways consumers and economists view markets

When it comes to the very basics of economics - production, trade and labor - average consumers and economists are on vastly different pages.

Consider public views on immigration, which often reflect fears that immigrants will steal jobs, or widespread pessimism about the health of the economy despite a raft of positive indicators. Another example is the widely held belief that "greedflation" - businesses exploiting increased demand by overcharging consumers - is the sole culprit behind increasing costs for food and other goods.

Assumptions like these form the basis of a new article co-authored by Amit Bhattacharjee, associate professor of marketing at the Leeds School of Business that examines the gulf between how nonexpert consumers and economic experts view markets.

"Many problems result from our understanding of economics being shaped by our firsthand experiences, because we miss a lot of what determines market outcomes," Bhattacharjee said. "The core insights of economic science invoke invisible forces whose impact is deeply counterintuitive and difficult to grasp."

Take product pricing, for example: "Supply and demand and all the competitive pressures that bring a given product to a certain place at a certain price point - all of them are far removed in time and place from any transaction you take part in, and none are directly observable," he said.

The article, published in January 2024 in Consumer Psychology Review and co-authored by Jason Dana, associate professor of management and marketing at the Yale School of Management, integrates emerging research on the economic beliefs and reasoning processes of economically untrained consumers, proposes a unifying mental model to capture them and explains how it fuels phenomena like protectionism, distrust in markets, demand for price controls and pessimism about the economy.

The researchers examined the impact of lay economic reasoning across an array of market contexts in four main areas of economic study: trade, industrial organization, labor and macroeconomics. Within each category, they highlighted real-world marketplace phenomena that appear rooted in lay perspectives, such as anti-corporate sentiment and aversion to automation, noted how they diverge from economic science and outlined the implications of these widespread beliefs.

Zero-sum thinking

According to the researchers, lay mental models of market exchange are moralized, intuitive and zero-sum, leading to judgments that often differ dramatically from those of economic experts.

For instance, based on what they observe day to day, consumers tend to believe companies that sell goods or services are more likely to benefit from transactions than buyers and do so at their expense. They often see companies as having sole discretion over the prices they charge and worry that they are free to gain more profit by short-changing consumers.

However, since purchase decisions are voluntary, consumers' beliefs overlook an axiom of economic science: that the very existence of a transaction suggests it is mutually beneficial because either party could opt out if they expected it to leave them worse off.
The idea that a company's gain is a consumer's loss is one example of zero-sum thinking, which also influences public views on topics like international trade, the researchers noted. Consumers are often averse to importing cheaper foreign goods because they fear it will weaken domestic industry.

Economic experts acknowledge that possibility but still overwhelmingly view free trade as mutually beneficial: Because consumers vastly outnumber domestic producers, more affordable goods still tend to improve overall welfare.

"There's a lot of demand for protectionism in international trade, whereas economic experts of varying political stripes believe that free trade tends to be better for most people," Bhattacharjee said. "There are winners and losers in the short term, of course, but overall it's much more beneficial to both sides."

"Economic populism always seems to exhibit this zero-sum flavor: 'Let's start a trade war with China' assumes there must be a winner and a loser. What's missing is that allowing lower prices could effectively make both populations wealthier and encourage industries in both places to conserve scarce resources by focusing on what they do best," he said. The same applies to "Let's protect ourselves from sellers who exploit us." These concerns make sense if consumers base their beliefs solely on individual transactions they've had with sellers, he added.

"If you only think about transactions in isolation without realizing that they're part of a repeated game, they all seem like zero-sum battles," Bhattacharjee said. Yet that realization matters, he notes: As long as markets are competitive and consumers can choose what to buy, sellers who try to exploit or overcharge them will quickly develop a bad reputation and lose business.

Moralized reasoning

Bhattacharjee's interest in this research started with an examination of anti-profit beliefs - "the notion that the most profitable firms are the ones that most harm consumers and society," he said. "That goes against basic economic theory, whereby any firm in a competitive industry must create more value than others to outcompete them and earn business by getting people to buy their product voluntarily."

Those assumptions are also supported by standard measures of corporate social responsibility, which consistently suggest that more profitable firms also tend to be more responsible. Believing the opposite to be true seems to imply that every purchase decision we make is self-defeating and makes our lives worse, he noted. So why might these beliefs persist if we're generally happy with most things we buy?

One reason is that our economic understanding is rooted in our moral intuitions, according to the researchers. Human morality may not be sensitive to invisible market forces, but it is highly sensitive to the motivations and intentions of others, Bhattacharjee said, adding that another hallmark of lay economic reasoning is "reducing economic issues to good and bad motivations."

"Laypeople assume that good market outcomes require good intentions. So if you're selfishly trying to maximize your own profits, there's no way you can actually benefit consumers," he said. "But the core idea of economics is counterintuitive: The pursuit of self-interest can benefit other people under the right conditions."

"Moralized judgments are very hard to change, and this is why economic debates are so politically charged," he added. "Poverty, wealth, inequality - all of these fundamental economic considerations are inherently moral."

Consumers' moral intuitions are reinforced not only by their experiences in the marketplace but by antibusiness narratives in popular entertainment (for example, Gordon Gekko's memorable speech about prioritizing greed in the 1987 film "Wall Street"), almost all of which reflect lay perspectives that economic experts would not endorse.

Similarly, the paper suggests that the public may be far more likely to encounter populist messaging from politicians than the consensus of economic scientists and may not be well equipped to discern whose take the evidence better supports.

Promoting better public understanding

The authors hope to spark new research in this largely unexplored area. Better understanding these economic misperceptions may unlock new insights about countless marketplace phenomena or reshape the way consumer psychologists currently view them, Bhattacharjee said. Such research may also point to useful applications or pathways for policymakers and educators to increase their impact, he added.

He sees unrealized opportunities for both to better communicate economic concepts and policies and therefore better bridge the gap between "what experts know and what nonexperts believe," Bhattacharjee said. "The general public is voting on these things, and everyone comes in with strong opinions regardless of whether they're informed or not. So the stakes here may be quite high."

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