Nobel Economics Winner — Kept on Fringes

The latest winner of the Nobel Memorial Prize in Economic Sciences (oddly named because it was not on the original list of Nobel Prizes) is the American, Richard Thaler. He did good pioneering work on Behavioral Economics. But despite the accolade, every effort will be made — successfully — to keep him on the sidelines.

Thaler is a heretic. He insists that human beings actually have behavior, have personalities, and that we should take that into account for better predictive results. Maybe then we would have predicted the 2008 recession, and the next one to come.

No way. That’s not allowed. The whole edifice of economic canon is based on Economic Man, an idiot savant who does nothing but calculate his advantages with perfect precision and perfect accuracy every waking minute of his life. No behaviour allowed.

Of course there are dissidents, Thaler among them, who want to build economic models based on actual human behaviour, not based on a moronic robot like Economic Man.

And why not, you ask? Well, the behavior of a bunch of moronic robots can be reduced to an exquisite set of mathematical equations, with predictable results. Try to introduce the quirky, irrational behaviour of real human brings, and the mathematics will blow up. No scientific predictions.

And why, you ask, would they prefer clean mathematics to a theory that models actual human beings from this planet? There’s a reason for it that over-rides all other issues.

But first I must point out that I’m complaining about the central creed of mainstream Economics. That’s the sacred cannon that informs, indeed bullies, almost every government on the face of the earth — and keeps the dissidents on the outside looking in.

Here’s the complaint. Mainstream Economics needs that beautiful mathematical edifice because it proves (with a few insignificant exceptions) that capitalist markets can do everything better than any other conceivable institution. Replace those robots with humans, and the mathematics won’t work. Then — horrors — somebody might conclude that unrestrained free trade is not always the perfect answer. We can’t allow that, can we?

Yes, Behavioural Economics is messy, though it does have its own mathematics — just not the anointed mathematics.

When accepting the prize money, Thaler said he’ll spend it “as irrationally as possible”, an inside joke linked to his study of irrational behaviour — especially in financial markets — the neglect of which produced the latest crash.

But he was not the first to point that out. Most notably, John Maynard Keynes presented that insight in the 1930s. The investment crash that led to the Great Depression was rooted in a systematic irrationality on the part of investors. It took half a century for the purists to root that heresy out of the sacred ideology. Now Keynesians are on the outs, respected for their abilities, but no longer allowed into the secret chambers. Thaler may indeed suffer the same fate. History repeats itself.

Thaler did more than that. A particularly interesting contribution is his analysis of nudging. Even if people are the rational morons of neoclassical theory, they can be fooled by markets. If government or some corporation can make the acquisition costs of Product A (money, time or trouble) higher than the acquisition costs of Product B — consumers can be nudged toward Product B — even if they really prefer Product A.

That’s another challenge to mainstream Economics, because there’s no way you can throw another variable — acquisition costs — into the mathematical model and have it still work as intended. Some fool might show a case where free trade is not the solution due to these manipulative behaviours.

So Thaler will be congratulated, lauded and rewarded for his ingenuity, but relegated to an Appendix in the textbooks — unless he can help the dissidents gain some real traction.

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