Roger Farmer has a couple of provocative
posts on behavioral
economics. The first
is entitled "The Economics of George
Orwell," where Farmer offers two
criticisms of behavioral
economists such
as Richard Thaler, George Akerlof, and
Robert Shiller:
1.
“Behavioural economists assert that what makes individuals truly happy can be
different from what they in fact choose to do. In Akerlof and Shiller’s words,
‘...capitalism...does not automatically produce what people really need; it
produces what they think they need...’ (p. 26).” From these assumptions, it’s pretty easy to
draw paternalistic conclusions, which lead, not to happier people, but towards Orwell’s
1984 dis-utopia; and
2.
Neoclassical economics doesn’t need behavioral psychology. Instead Farmer insists, “we can understand
all of the failures of classical macroeconomics without giving up on rational choice.”
Leaving Farmer’s second proposition for a future post, I do want
to say something about “classical liberalism,” an outlook affirmed by Farmer
and well-expressed in his critical reaction to the very idea that someone could
know a person’s “true preferences” better than the person, himself, does.
Consider one of the most effective “nudges” emerging from
behavioral economics – changing the default option for employee contributions
to a deferred income account from zero to, say, 5%. In other words, instead of requiring
employees to “take action” in order to defer income, they now have to “take
action” to avoid deferring income. Does
this change in the default option assume that policymakers know more about
employee preferences than the employees themselves do?
Not necessarily.
Suppose there’s lots of research showing that a great many middle-age
workers either haven’t done any retirement planning or have wildly optimistic forecasts
of their income in retirement. By
“wildly optimistic,” I mean forecasts that would be rejected by, say, 95% of
certified financial planners. So, in
this case, the policymakers aren’t substituting their (assumed) preferences for
“less current income and more future income,” rather they are assuming that if
employees had reasonable forecasts of their own retirement income, many of them
would choose to defer some their current income.
Farmer says, “The idea that the government knows my
preference better than I do is a little too Orwellian
for me.” I think it’s worth
distinguishing between “ill-informed” and “well-informed” preferences. Granted, this distinction can become a
pretext for paternalism. But, in the case at hand, no one is compelling
employees to save more. Requiring
employees to “check a box” to opt out of a deferred income plan doesn’t really
qualify as “Orwellian,” particularly when some sort of default option is
required in any case.
The fact that a significant number of employees began to
defer some of their income when deferral became the default option raises
another, deeper question about Farmer’s classical liberalism, namely how do our
preferences arise, persist, and change over time? Can anyone really believe that capitalism
always produces “what people really need”?
Farmer’s models include profit-maximizing firms. Are we to assume that producing “what people
really need” is always more profitable than creating new “needs”? Should we assume that the $180 billion U.S.
firms spent on advertising in 2012 merely conveys information to the public?
No comments:
Post a Comment