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28 May 2009

Behavioral Economics, Again

I'm sorry to bring this topic up again, but I feel as if I didn't do a very good job of explaning my position in my previous post. I got too caught up in the political philosophy of positive and negative freedom when I could have been more direct and concise in my critique.
I just watched this interesting video with Dan Ariely, the author of Predictably Irrational, and the issue came back into my mind. Watch the video, and then I'll share my thoughts. (If the embedded video doesn't work for you, as it isn't for me, then you can view it here).

I like Dan, and I enjoyed his talk - it's interesting and entertaining. I would also like to read his cookbook - let's hope he still plans on writing it. I am also interested in behavioral economics. It is a necessary antidote to the abstract hyper-rationality of Neoliberal economics, which would rather trust in the "invisible hand" of the market than allow regulation. It's about time economists looked at how people actually are rather than positing a model and developing theory based on that. However, I have three major problems with the theory, which I will describe below.
First of all, it is just as fallacious to assume that humans are wholly irrational as it is to assume that we are wholly rational. Humans are complex creatures with many different, and at times competing faculties. Our actions are determined by an intricate mix of reason, emotions, spontaneous thought and default reaction. As the research suggests, it's true that we make some bad choices from time to time. With regard to the organ donor example in the video, though, I would ask why it is that the countries on the left don't have 0% participation, and why some of the countries on the right don't have 100% participation. What factors made it possible for some people to go against the predictions of behavioral economics? More fundamentally, however, I feel that the assumption that we are wholly irrational opens up the possibility for someone to say that our decisions must be guided or dictated, which brings me to my second point.
In the talk, Ariely says "We feel as if we make decisions...but in fact, the decisions reside in the person who designed the form." The question is, who gets to design the form? Who gets to make those decisions for us? Some would suggest a kind of enlightened bureaucracy, but the fact is that bureaucracies are not composed of the best and the brightest, and they certainly don't know what's best for us all of the time. It doesn't seem like a big deal when it's something like hip replacement surgery or organ donors (though those have their complexities as well), but what happens when it's something a little more ambiguous? Where we invest our retirement, for example. Who makes that decision? How do we know that they will make the best decision?
My final problem with the theory is that it is essentially ahistorical and apolitical. Our current economic problems, it suggests, are the result of bad economic decisions made by irrational individuals on a massive scale. It takes no account of the political economic (not to mention the political ecological) situation that lead to this crisis - the fact that millions of people were being exploited by large corporations, that the government was essentially (and continues to) back those corporations up, and that our redistributive mechanism had been retooled to fuel the wealthy in the (mistaken) hope that the wealth would "trickle down" to the rest of us.
We need an economics that is grounded in real world experience, one that recognizes human limitations as well as human abilities. We also need an economics that is situated in the social and cultural context of modern life - including the political and the ecological. Behavioral economics is a good start toward ending the hegemony of neoliberal capitalism, but it is far from being the ideal basis for economic theory.

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