Osborne teams up with Richard Thaler: latest exponent of the drear conviction that we\’re all little idiot baa lambs and have to be driven into behaving properly. You know, managed, prodded, but all for our own good of course.
But perhaps most significantly, the crisis has finally put to rest the assumption, which underpinned Labour\’s entire system of financial regulation, that individual behaviour is always entirely rational…
Who has ever said that individual behaviour is entirely rational? That we attempt to be so, that we attempt to reach our desired goals in the best manners available to us given the information about the world that we have plus the inevitable imperfect information about the future, sure….but the leap to perfect rationality from that is something of a straw man.
and that market prices always reflect intrinsic values.
What? What in buggery are \”intrinsic values\”? If we\’re all the way back to Thomas Aquinas and \”true value\” then we\’re about to march off a very steep cliff. For there isn\’t and aren\’t any such things. The value of something depends upon the value of everything else: we cannot say that 1 kg of gold is worth $12,000, or x tonnes of wheat, or y tonnes of fresh water or z numbers of smiling babies, without having some idea of the relative values of fresh water and smiling babies. Which in turn depend upon the state of knowledge (medical knowledge tells us what our forefathers did not know, that unfresh water leads to definitely not smiling and in fact dead babies) and the state of technology (how much effort do we have to put into freshening water to get smiling babies?) and indeed where we are at any one time (less effort if we\’re by a clear mountain stream, more if we\’re on a boat out in the ocean).
Values are thus relative, always, all the time, not intrinsic.
We can just about side step this and go for a much weaker meaning of \”intrinsic\” which is \”what people think these values are\” but then by definition market prices are the average of what everyone does think these values are.
So we\’re not off to a good start here.
A classic example is the way that Gordon Brown\’s tax credits system was initially designed. Obviously, we are in favour of tax credits, but when the system was first introduced it was assumed that people would promptly inform HM Revenue and Customs of any change in their income. That must have seemed so plausible on a spreadsheet on the then chancellor of the exchequer\’s desk. But of course, as it turned out, people don\’t quite behave like figures on a Treasury spreadsheet, and as a result billions of pounds were lost on overpayments.
So if we recognise that people do not always act rationally, what does this mean for public policy?
Eh? What is irrational about keeping overpayments to you? At least once (and I think more than that) they\’ve been written off. So this behaviour is in fact entirely rational. You might have to pay the money back, you might not. So hang on to it and wait and see. You can\’t be worse off by doing so and you might be better off by doing so. This is rational action, not irrational.
That Osborne and Thaler (and of course Brown himself) cannot see that this is rational behaviour really rather bites at the arse of the idea that politicians are going to be more rational than we are now doesn\’t it?
They then maunder off into behavioural economics which is a very different thing.
So if we recognise that people do not always act rationally, what does this mean for public policy? This is where behavioural economics and social psychology – an academic field that has already garnered Nobel prizes for the likes of Daniel Kahneman – comes in. These disciplines are enabling us to develop a new approach to policymaking, based on empirical evidence about how people really behave.
Here is one example. Over the past decade, the UK government has spent billions of pounds trying to encourage households to become more energy efficient. These efforts have largely failed, but it doesn\’t have to be like this. In Sacramento, an energy company has harnessed the insights of behavioural science, and prints information on energy bills that allows households to compare their energy use with similar homes. This simple change led to a fall in overall energy consumption as homes using more energy than their neighbours quickly adjusted their behaviour to fit in with the norm.
In what way does this undermine the thought that people at least attmept to behave rationally? What you\’ve just done there is increase the information available to people, OK, great. But you\’re then still depending upon them acting upon that information in a rational manner, aren\’t you? You\’ve again undermined your assumption of irrational behaviour: indeed, the very success of this scheme obliterates that assumption as with new information people are acting upon it rationally.
Jebus, if this is how the Shadow Cabinet thinks then we\’re fucked, aren\’t we?
Behavioural economics is all very well (\”Hey, wow, you mean that\’s the way people actually behave?\”) but none of it leads on to the idea that people aren\’t rational within the bubble of their own desires and the information available to them. Nor to anything quite so medieval as \”intrinsic values\”.
And most certainly not to the idea that the bloke who\’s good at kissing babies in Tatton is more rational than we are when faced with our choices about our lives.