Disrupting the Econocracy? Thaler's Prize

The mutual admiration event of the Econocracy's year is the award of the 'Nobel Memorial Prize in Economic Science', which is announced at about the same time and in the same sort of way as the real Nobel prizes. But this prize was funded by Scandinavian banks, many decades after the original Nobel benefaction; before the absolute triumph of the 'rational expectations' dogma but well into the era when Economics had been captured by the neo-Keynesians who were about to show the dangerous impact of their views as applied [on their advice] by governments when the inflation that was the inevitable result of the flawed dogma began to bite into individuals' welfare and to undermine government strategies. Through the later nineteen sixties and into the 'seventies a back-catalogue of economic writers from the previous forty years were rewarded with the new prize, which was often split between two or more winners [thus quickly building-up the list of 'Laureates'] . After that the prize has been awarded to a mix of writers who have [in general] more or less closely subscribed to the increasingly tight dogmatic requirements of the Econocracy as they have tightened their control of the standard syllabus in Economics for students [as explained in the text Econocracy, frequently mentioned in the blog and created by the Post-Crash Economics Society at Manchester].

There have been occasional exceptions to this command of the prize by the dominant faction of Economics grandees, achievable because the electors' view of the world from the expanses of Scandinavia is broader than from Chicago, Princeton, the LSE or Cambridge; and thus other points of view have had a look-in from time to time. But those individuals have deferred, in general, to the overriding assertions of 'scientific' rigour, purity and authority that has been claimed by the Econocrats.

Thus this year's prize has been hailed as a novelty, a breakthrough; maybe as the gateway to a new era. This is the award of the prize to the hugely respected Richard Thaler, best known as the advocate of the 'Nudge Theory': a psychological insight that can be said directly to contradict the assumptions about humans' behaviour that lie at the heart of Econocratic dogma. Thaler has drawn on psychology to suggest that people do not behave as Alfred Marshall assumed in his Principles of Economics [1890] and which subsequent authoritative figures have built up constantly as the core of current theory. The critics have been delighted to welcome this award to Thaler as evidence that even the committee awarding the pseudo-Nobel Prize are open to the view that homo economicus - 'economic man' - is not a true or fair representation of real, living and breathing human beings.

The entire modus operandi of the Econocracy is based on the assertion that people will act 'rationally' if they have enough access to the facts on which they should reach economic decisions. Individuals will allocate their scarce resources to those purchases that will maximise their welfare over their lifetimes; thus dividing their spending between present needs and the demands of the future [such as providing for pensions and medical care in old age]. Recognising that resources are scarce, economic man will always buy what will do him most good and and least harm: always assuming that sufficient evidence of potential outcomes is available to him.

A few minutes' observation of real humans gives the lie to this daft assumption. Stand in any street and watch the obese people waddle laboriously along, eating something from a packet. Look at the flashy cars that young men can only afford to hire-purchase at the cost of making no provision for the future [and often not insuring the vehicles]. Look at the drunk, drugged young women in the gutters in any major city at weekend. Read the data on early deaths and completely burnt-out people still in their twenties.

Since real people behave so irrationally, it cannot be expected that whole communities whose coalmine or steelworks is closed down on the basis of fake data by a Thatcherite government [whose real objective is to eradicate the trade union that is embedded in the 'redundant' plant] will abandon their community, their homes and their connections, and migrate as individual families to places where there may or may not be new jobs for them. How do five hundred redundant miners assess such a situation? They can't: and anyway even a Thatcherite government is subject to the 'irrational' need to win the next election: so they maintain the denizens of the pit villages in situ with social security payments, early access to pensions and other means by which no 'rational' economic decisions need to be taken by the population. Hence both people and their political systems can be seen to be 'irrational' every day.

Thaler does not approach the issue as I do in this comment; but he suggests means by which people can be 'nudged' more constructively to react to the situations in which they find themselves. In doing this he has performed a major service: not just to 'economic science' but potentially to humanity. But this does not rescue Economics from its guilty hold on the essentials of human interaction: Thaler has cast light, and proved that his theories have traction in reality: which is great. But much more is needed to smash the Econonocracy; who can choose to teach their students that real people can be nudged to behave more like homo economicus: which would be the worst outcome of all.