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Thursday, November 7, 2013

Behavioral Economics and Humanist Values

The following is an essay composed for the Humanist institute:
Humanism has long described itself as a progressive philosophy of life, but exactly what the word “progressive” means seems a matter open to debate. If the term is to be understood in a political or economic sense, then certain narrow assumptions apply, however, if one holds the term in the stricter sense of only pertaining to civil liberties, then the meaning of the term can be widened to the point at which it loses almost any relevant meaning in the world today.

Progressive politics today seems to have coalesced around a kind democratic socialism, that is, simply stated, a maximizing of individual freedoms within the context of a strong social safety net. Under such a system one would expect a full range of liberties as might be found in the United Nations Declaration of Human Rights, and a full range of protections that can be afforded by a strong central government. Universal health care, social security, a fair and just criminal court system, and a mandatory living wage would exist at the high end of such a system today, while basic liberties such as freedom of speech, fair and just elections, freedom of association and freedom of conscience would at a minimum exist at the low end.

Under such a philosophy, a wide range of stances regarding the best form of government are available, ranging from a United States style democratic republic to certain types of socialist and perhaps even communist governmental systems. Theocracies, oligarchies and monarchies would be mostly out of bounds.

As for economics, for the longest time Humanists have fallen into roughly three camps, Marxists, Keynesians (progressive capitalists) and Libertarians. Broadly speaking, Marxists would see the economy mostly managed by the government, Libertarians would see the economy mostly managed by private interests, and Keynesians would see the economy as a mix of both.

Here I am going to argue that recent work in the field of behavioral economics, especially along the lines of rational choice theory, have seriously undermined Libertarian arguments, and therefore libertarian Humanists, who value science, should begin to seriously reconsider their economic assumptions.

One of the key assumptions of neoclassical economics is the idea that human beings act as “rational utility maximizers,” that is, people will make the best possible economic decisions when presented with choices. Because economics is such a complex subject, economists have long used a short cut, reducing human decision making to a model sometimes referred to as homo economicus, a theoretical being who is always rational and self-interested. Such a being exists in a world of perfect and accessible economic information and never fails to make the best possible decision given the range of available options.

Now a moment’s though should give rise to the problems inherent in such a simplification. We all know that people are not always rational actors, that they do not have access to perfect information and are prone to making mistakes. Constructing an economic system with such a simplified model would be as disastrous as constructing a steam locomotive without taking into account something like friction. As a result, many economists eschew the use of such simplicity or advance the case by coming up with more complex models.

Of the (broadly speaking) three options for managing the economy mentioned above, it is the Libertarian position that is most dependent on rational actors and the concept of being “free to choose.” Even as Libertarian economists for the most part accept the reality of imperfect information and non-rational actors in real world economics, at core the theories still rely on the central concept of being free to choose, hence the primacy of the Libertarian value of “Liberty.”  More and more we are finding, through the experimentation of behavioral economists, that real people are not in fact free to choose in any kind of meaningful way.

Science has clearly shown that instead of weighing an overwhelming amount of information to make a complex economic decision, for instance, what cellphone plan to purchase, human beings make heuristic decisions, time saving mental shortcuts that have different constraints from rational, self-interested decision making. My choice of cellphone plan might be based on the kind of phones my friends have, the convenience of the bill paying system, or on factors that are in essence ineffable. Such decision making bears little resemblance to economic rationality.

Further, these decisions can be influenced by “nudges” as obvious as advertising, as subtle as a red sticker on a certain package or the location of an item within a store. Retailers and advertisers study these effects and have reams of data demonstrating the best ways in which to influence a person’s buying decisions in ways that are most imperceptible to the customer.

Further, behavioral economists have also demonstrated that too much choice can overload and fatigue us, actually having an affect on our moral intuitions as well as any rational decision making processes we may or may not undertake. Think about large, complex restaurant menus, and how much easier it is to order when the choices are simpler. The dining experience can often be enhanced by less, not more choice.

The Libertarian model of humans as rational decision makers means that interference in economic systems is unwarranted, as humans will make the (mostly) best decisions (most) all the time. However, if people are not behaving rationally, then markets will also behave irrationally, leading to bubbles around such commodities as tulip bulbs and mortgage backed securities. Under such an unregulated system we might end up with gigantic mega companies that are too big to fail, for instance.

Once we start to understand that human beings are not the kind of consistently rational actors that neoclassical economics insists upon, we can begin to better understand the boom and bust cycles and think of ways in which to smooth things out through government intervention. This was the insight of John Maynard Keynes when he invented the discipline of macro-economics. Our irrationality, in a sense, is the friction long ignored in the monetary system.

Occasional government intervention in our economic system is necessary, says Keynes, to avoid the kind of record inequality we are facing today. Government is the only institution large enough to stand outside the economy and occasionally apply corrective interventions consisting of taxes, regulations or trust busting.

So, if Humanists want to be consistent supporters of science and reason, they have many good reasons to be wary of the highly simplistic answers offered by Libertarian and Objectivist economists. They might not love the idea of a large government interfering in markets, but history and science have conspired to demonstrate that progressive economic policies and democratic socialism is (so far) the best way in which the economy can be managed and human wellbeing encouraged.

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