Ali Sarzaeem: The Difference Between an Engineering and Accounting Mindset and a Social Science and Economics Mindset

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Perhaps one of the most influential articles I have read in my life is one written by John Forrester several decades ago, in 1971, titled "Counterintuitive Behavior of Social Systems." In this article, the author states that social phenomena exhibit behaviors that cannot be understood or predicted by ordinary intuition, because our conventional understanding has a linear and mechanical grasp of phenomena, whereas in most social systems, feedback mechanisms exist, and this very fact makes a system nonlinear. Precisely for this reason, understanding, analyzing, and predicting social phenomena is something that requires education and practice, and one cannot rely on individual intuition. Perhaps the characteristic of an engineering, and especially an accounting, mindset can be described as viewing and analyzing issues statically, whereas the characteristic of a social science and economics perspective is dynamic analysis. In the social sciences, and particularly in economics, individuals learn to analyze issues not so much as a linear optimization problem, but as choosing a strategy within a multilateral game, where every move will bring about the reactions of others, and it is from the aggregation of behaviors and actions that the final outcome is determined. To make this claim clearer, I will offer a few examples.

In the field of healthcare, our country previously faced many problems. For example, treatment costs had risen, but insurance covered only a small portion of these costs, and as a result, patients were forced to pay the difference, commonly referred to as "out-of-pocket" payments, from their own pockets. This caused households with low income or savings to quickly fall into the abyss of poverty when faced with an expensive illness. Well, in such a situation, physicians came to power who imagined they were facing a simple problem that required no specialized knowledge of health economics. From their perspective, the problem was clear, because they imagined it was enough for the government to assume the major part of the difference that was being paid by the people. In this way, the balance would still be maintained, and the pressure on the weaker strata would be lessened. This view reduced the problem to a simple accounting equation, with costs on one side and the resources that must pay for them on the other. This simplistic analysis led to the launch of the Health Transformation Plan, with the assumption that the problem of treatment could be easily solved and a good legacy left behind.

The reality is that these variables are not mechanical variables indifferent to the composition of resource provision; rather, these variables are the outcome of human behaviors, and people's behavior is completely influenced by economic policies. For instance, when the major part of treatment costs is to be paid out of the patient's pocket, if a doctor wants to recommend a more expensive treatment instead of a cheaper one, they will face a guilty conscience, but when the cost is to be paid from the government's pocket, this guilty conscience will no longer exist. Naturally, since the patient also probably imagines that the more expensive treatment is more effective for their health, they will insist on this more expensive treatment and help the doctor overcome their guilty conscience.

Furthermore, when treatment costs are to be paid out of the individual's own pocket, their incentive to visit a specialist doctor instead of a general practitioner, to be hospitalized instead of receiving outpatient treatment, and to choose expensive treatment over cheap treatment will be low. However, when insurance or the government is to pay the bulk of the cost, the aforementioned incentive will increase, and individuals will go to a specialist doctor at the slightest excuse, with the cost falling on the government or insurance companies.

The sum of these two behaviors, from both the doctor and the patient, caused treatment costs to increase sharply, to the point where the government and insurance companies could no longer afford to pay the difference, and once again the amount to be paid out of the patient's pocket increased, and the problems arising from catastrophic healthcare costs re-emerged, showing their unpleasant consequences.

If health sector officials had not relied on their intuitive assumptions and had valued the knowledge of health policy, they would have read this simple point: wherever the government or insurers pay the costs, the problem of moral hazard arises, and if a cost-control mechanism is not implemented, costs will skyrocket. We are not the first country to experience such a mistake; other countries made the same mistake before us, and their errors were documented in books. Unfortunately, however, we did not value reviewing the experiences of others, repeated their experience, and squandered the country's resources in this way.

Another example is from the petrochemical industry. Years ago, the slogan was raised: why should we sell crude oil and import expensive petrochemical products in return? Wouldn't it be better to stop selling raw materials and instead import products with higher added value? This seems like a sound idea. Project evaluation analyses should also ostensibly support this idea, because when the price of a product is high, it usually justifies the costs of establishing a factory, and this was also true for the petrochemical industry. This perspective is again a linear and static one, and it does not consider the dynamism of the issue and the multilateral nature of the game.

The main point is that if this idea occurred to us Iranians, it has naturally also occurred to other oil producers, because it is not such an original and novel thought that no one else would think of it. Now, if others simultaneously seek to create petrochemical industries, the supply of petrochemical products in the global market will increase, and when the supply of something increases but global demand does not, the price of that product will fall. Now, when the price of petrochemical products falls, all the analyses regarding the economic viability of establishing a petrochemical plant collapse, and the project may lose its economic justification because its main assumption was that the products would be sold at high prices! Once again, linear analyses derived from an engineering perspective lead to the wrong answer!

The third example relates to an analysis presented by a former minister who, incidentally, has an advanced engineering degree. He placed all government revenues on one side and expenditures on the other, then divided government revenues into oil revenues and non-oil revenues, and then on the expenditure side, divided costs into current and capital expenditures. He then stated that current expenditures should be financed from non-oil revenue (taxes) and capital expenditures from oil revenue. Then, based on the exchange rate, he devised a plan to completely separate the current budget from oil revenue within a few years and finance it solely from non-oil revenue. This analysis, which seemed original from the proposer's perspective, is in fact an accounting snapshot of the budget and does not consider that it is dealing with economic variables that have complex relationships with each other. For example, tax revenues are not unrelated to oil revenues. Also, the exchange rate variable affects all the variables in this simple accounting relationship. Therefore, one cannot imagine that a single component can be easily changed without affecting the other components. This accounting relationship is not a mechanical relationship between variables but an economic relationship between economic variables.

These three examples aimed to show that linear analyses stemming from accounting or engineering perspectives on economic and social phenomena cannot provide appropriate analyses of economic and social phenomena, and for this reason, their predictions usually lead to error. Equipping the mind with an appropriate perspective on economic and social phenomena depends on education, practice, and training, and it is a mistake to imagine that this perspective can be achieved by relying on personal creativity.

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The Difference Between an Engineering and Accounting Mindset and a Social Science and Economics Mindset

Author: Ali Sarzaeem

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