The disconnect between today’s economic theories and what we see in the real world is stark and widely acknowledged. A series of major economic approaches—Keynesian, monetarist, new classical, and most recently the great moderation—have failed us with drastic consequences. We’ve hit a crisis point, with fiscal cliffs, bank bailouts, sovereign debt crises, massive deficits, widespread public demonstrations and deadlocked lobby-driven politics. More troubling is that we continue down the same road—because even our experts are relying on flawed theory.
It’s time to replace our way of thinking right from the basics. Models like expected utility, cumulative prospect theory and even the venerable supply and demand framework need major updating. The Austrian school of economics has provided us with significant insight, framing economics as a human rather than mechanical endeavour, but we still need to go further to explain our world. Here we introduce a new theory—give & take economics (also referred to as give & take decision theory or psychological economics). It’s a single pragmatic model which takes account of economic, political, sociological and psychological influences to a decision—and it’s boiled down to a simple construct, like supply and demand, that we can apply in business.