For decades, economists have been known for their commitment to theories that treat ordinary consumers and workers as highly rational decision-makers. Until recently, the idea that psychological ideas and research methods could be useful in economics was not taken seriously.
This psychological approach, now called ‘behavioural economics’, was pioneered by a few groups of wayward economists in the 1980s. But this is now one of the fastest-growing and most fashionable fields of economics. The winner of the 2017 economics Nobel Prize, Richard Thaler, is a behavioural economist who goes out of his way to distance himself from traditional economics. For example, he has written: ‘If you look at economics textbooks, you will learn that homo economicus [i.e. the human being as represented in economics] can think like Albert Einstein, store as much memory as IBM’s Deep Blue, and exercise the willpower of Mahatma Gandhi. Really. But the folks we know are not like that. Real people have trouble with long division if they don’t have a calculator, sometimes forget their spouse’s birthday, and have a hangover on New Year’s Day.’ Thaler’s claim is that behavioural economics breaks away from these textbook abstractions.
The book from which this quote comes is Nudge: Improving Decisions About Health, Wealth, and Happiness, co-authored by Thaler and Cass Sunstein (Yale University Press, 2008). Thaler and Sunstein propose an approach to public policy-making that has been very influential. The central idea is that people are prone to make mistakes in their economic behaviour, and that it is the job of governments to anticipate these mistakes and to guide (or ‘nudge’) citizens towards choices that are in accord with their ‘true’ preferences. We are invited to think that if policy-makers act on the advice of behavioural economists, they can identify the psychological mechanisms that lead people to make mistakes and uncover individuals’ true preferences. For example, behavioural economists who favour nudging often claim that people who are overweight are deficient in self-control – they truly prefer low-calorie diets, but these preferences are overridden by psychological impulses to eat more. So policies which promote low-calorie diets are not just in what the government judges to be the best interests of overweight people; these policies are helping these people to achieve what they themselves prefer.
On a larger scale, this way of thinking runs counter to a very long tradition of liberal, anti-paternalistic ideas in economics. In this tradition, competitive markets have generally been viewed favourably (although not uncritically – economists have always recognised that markets need to be regulated). The market has been seen as a mechanism that upholds the ‘sovereignty’ of consumers by supplying them with the goods and services that (given their income) they want to buy. Or – which has often been thought of as another way of saying the same thing – a competitive market is efficient in satisfying individuals’ preferences. But if psychological forces lead people to buy what they don’t really want, or if people’s choices don’t reflect their true preferences, what is left of this kind of argument? There is a growing tendency for behavioural economics to be presented as challenging, not merely the assumption that behaviour is ‘rational’, but the whole liberal, non-paternalistic tradition of economics. Indeed, Thaler and Sunstein say explicitly that the findings of behavioural economics make paternalism ‘inevitable’; the idea that there are viable alternatives to paternalism is a ‘misconception’.
I have been a behavioural economist since the pioneering days of the 1980s, when UEA was one of the few places in the world where economists ran experiments. But, for even longer than that, I have been an opponent of paternalism in economics. I have been dismayed by the extent to which ideas like those put forward by Thaler and Sunstein have become accepted in behavioural economics, and by the enthusiasm with which these ideas have been taken up by policy-makers and have become mainstays of public debate. Over the last decade, I have written a series of academic papers arguing for a different understanding of the implications of behavioural economics. I have now brought these arguments together in a book which has just been published by Oxford University Press: The Community of Advantage: A Behavioural Economist’s Defence of the Market. ‘Community of advantage’ is a phrase used by the great Victorian economist John Stuart Mill to describe a market economy. The idea it expresses is that civil society is made up of institutions within which individuals cooperate for mutual benefit, and the market is one of those institutions.
In my book, I try to show that it is possible to uphold the liberal, anti-paternalist tradition of economics while accepting the findings of behavioural economics. I argue that the whole idea that individuals have true preferences, distinct from the psychological processes that explain their actual behaviour, is misguided, a hangover from the theories of rational choice that behavioural economics has disconfirmed. I offer a defence of the market which does not use the concept of preference.
My starting point is to ask what, in the domain of economic policy, each citizen wants the government to do for him or her, and (going on from that) what citizens can agree they want the government to do for them collectively. I argue that it is in each individual’s interest, as he or she understands that interest, to have the largest possible range of opportunities from which to choose. Collectively, it is in individuals’ interests that opportunities for voluntary interaction with one another are not restricted. If properly regulated, a market economy provides just these kinds of opportunity. All this can be said without saying anything about what individuals’ preferences actually are.