Capitalism is not a spontaneous order. The compositional fallacy, however, makes it tempting to believe that it is. Since it is in everyone’s interes… - Joseph Heath

The perfectly competitive market is more like the Atkins diet than a frictionless plane. The Atkins diet, one may recall, is the one that recommends eating only fat and protein—scrambled eggs, steak, bacon—but cutting out all carbohydrates. It works by tricking the body into thinking that it’s starving, thereby prompting it to start breaking down and consuming its fat reserves. But in order for this to work, you have to really trick your body, and that means absolutely no carbohydrates. People who follow a 100% Atkins diet can in fact lose a lot of weight. But one cannot infer from this that following a 99% Atkins diet—eating a lot of fat and protein and just a tiny bit of carbohydrates—will lead to almost as much weight loss. On contrary, it’s a recipe for putting on massive amounts of weight. In fact, “almost” following the Atkins diet is far worse than not dieting at all.

One of my favorite Paul Krugman papers is called “Ricardo’s difficult idea” — on why people have such a hard time understanding the concept of “comparative advantage.” Although the situation is not quite as bad, I’ve been struck recently by how much difficulty many people have trying to understand the concept of a “collective action problem.” Although that idea has a bit more history to it, I don’t think it’s too much of a distortion of the record to call this “Hobbes’s difficult idea.”

What are we to conclude from all this? The most obvious lesson is simply that human psychology is infernally complicated. The standard assumptions that economists have been known to make about human rationality and the way that people respond to incentives represent a gross oversimplification. Sometimes this simplified model produces incredibly powerful, highly generalizable results. But sometimes it generates predictions that are totally off base. Increasingly, economists are becoming aware of this—there has been a significant move toward so-called behavioral economics within the profession. This approach, as the name suggests, pays a lot more attention to how people actually behave. Unfortunately, behavioral economists have yet to generate anything with the explanatory and predictive power of “the model” that is taught in Economics 101, and so the latter continues to exercise its intoxicating (and sometimes toxic) influence on the minds of the young.