Tuesday 25 March 2014

Left and Right united against Behavioural Economic Policy

Chris Dillow is my second favourite Marxist after Jon Elster. He here critiques Tim Harford on behavioural economics and economic policy.
Tim Harford's brilliant essay on behavioural economics highlights an ideological bias in the way the subject is used.
What I mean is that he presents it as "a hot idea for policy makers". This underplays two things.
One is that politicians themselves might be as prone to cognitive biases as the public. Indeed, it's possible that they are selected for such biases - because the overconfident are disproportionately likely to enter politics and because irrational consumers are likely to make irrational voters. The image promoted by behavioural economics (or its users) - of rational policy-makers operating upon irrational subjects - is therefore questionable.
The other is that there's an alternative use of behavioural economics. It could serve an educational function - of telling consumers what errors people commonly make, and of warning them against them. A lot of my day job is just this.
I made much the same suggestion in my review of Dan Ariely's book for the Christchurch Press. As a self-help guide, behavioural economics is really valuable. As a guide for policy, a bit less so.
Behavioural economics gives economists the chance to live up to Keynes' ideal of them, as dentists giving humble competent advice. And it's a chance they are blowing.
Now, you might reply here that it has always been so, Economics has long been pompous white men in suits speaking to other pompous white men in suits, rather than a dialogue with the public. That's true. But there's a big difference between telling politicians "people are rational maximizers so leave them alone" and telling them "people are stupid and here's how you can manipulate them."
In this context, there's both similarity and contrast between users of behavioural economics and Marxists. Both believe that ideology or cognitive biases (they're much the same) stop people pursuing their best interests. Where they differ is in how they respond to this. Marxists think people should be educated out of ideology and therefore empowered: "theemancipation of the working class must be the work of the working class itself”. Most users of behavioural economics, by contrast, see cognitive biases as just more policy tools, and thus ways of empowering rulers. But it needn't be so.
Strongly endorsed.


  1. A real Marxist would say that this is just the capitalist process of neutralising critique by absorbing and subverting it. The critique moves from a revolutionary statement to part of the capitalist oberbau that controls the proletariat qua workers and consumers.

  2. Isn't that kinda what Chris said? The State wants to use behavioural econ tools as further control mechanisms rather than encouraging the proletariat to use those tools themselves to achieve emancipation. And that's about what I'd said too: as self-help book, behavioural econ can be great. As set of policy levers, not so much.

  3. What I didn't get from Chris is the 'of course' I would have expected from a Marxist analysis. Of course behavioural econ is being turned to these purposes. It could be used, e.g., to demonstrate that the efficient markets hypothesis is flawed, and that therefore the financial sector doesn't earn the money it receives. Instead, of course, it is being used to nudge ordinary people to behave.

    And to be honest, I'm not sure where personal self-help fits in the analysis. Is it an awakening or false consciousness?

  4. George Stigler in the 1960s made a great critique of what became behavioural economics saying that in every decade for the last 150 years, economists dabble in psychology. They missed the point of economics as a method. The simple hypothesis behind economics is so powerful because it can account for so much of human behaviour.

    Richard Posner went further and argued that behavioural economics may not be a science in Popper's sense of falsifiability.

    Posner referred to Cardinal Bellarmine’s famous debate about what he saw in Galileo’s telescope, which was pointing to the moons rotating around Saturn. Cardinal Bellarmine explained this away as a trick of the devil.

    Behavioural economics, in Posner’s view, is close to explaining anomalies
    either as cognitive quirks or rational behaviour. Nothing is an anomaly for behavioural economics so nothing can falsify it.

    Posner’s key point was: “Rational-choice economics makes the analyst think hard. Faced with anomalous behaviour, the rational-choice economist, unlike the behavioural economist, doesn't respond, "Of course, what do you expect?" Troubled, puzzled, challenged, he wracks his brains for some theoretical extension or modification that will accommodate the seeming anomaly to the assumption of rationality.”

  5. That last one's a good question. Would say being informed about common errors should help you in being more vigilant in like situations. But, if all that does is help you better operate in the system, then I can see what you're getting at.

  6. That is a good quasiquote from Ed Glaeser in your linked review, could you be a bit more specific as to the source please?

  7. Try Glaeser's Psychology and the Market. http://www.nber.org/papers/w10203.pdf

  8. I also like Jon elster. Geoff brennan assigned his books at ANU