On Monday, the Swedish socialists who decide who gets the Nobel Prize in economics chose another proponent of “behavioral economics,” the University of Chicago’s Richard Thaler. It was a poor choice. Thaler might be very smart and even clever, but his contribution to economics was largely, as he put it himself, to “make a career stealing ideas from psychologists.”
Thaler and other “behavioral economists” observe that many people do not seem to act purely rationally all the time. Sometimes we exaggerate risk, procrastinate, give in to temptation, and fail to save for the future. Sometimes we need to be “nudged”—Thaler’s most influential book, coauthored with Obama official Cass Sunstein, was titled “Nudge”—to save for the future or make choices that seem, to an outside observer, to be in our best interest.
Of course, some of this is true. Yet the core problems with behavioral economics are two-fold.
The Psychologists’ Work Thaler Relies On Is Shaky
First, Thaler and others stole their ideas from the wrong psychologists. Like many other academic disciplines, psychology was invaded by liberals and socialists in the 1960s and today is dominated by people who self-identify as liberals or far-left. Researchers such as Edward Deci and Richard Ryan and popularizers such as Daniel Pink, Dan Ariely, and Alfie Kohn cherry-picked the data to claim psychological research showed competition, rewards, and freedom of choice—the foundations of capitalism and a free society—are unhealthy or counterproductive. One result of this conquest is today’s “participation trophy” and “snowflake” culture.
Thaler and Sunstein relied on these liberal activists pretending to be psychologists for much of their “evidence” showing how people are “predictably irrational.” In fact, other scholars did not replicate the findings of these activists, and their conclusions were explicitly debunked by some researchers who tried, such as Judy Cameron and David Pierce. Had they read this literature more thoroughly, Thaler and Sunstein may never have come up with the “nudge” idea.
The second problem with behavioral economics arises when its proponents claim their findings undermine or contradict the “assumption of rationality” that “provides the foundations for economic theories, predictions, and recommendations” (quoting Dan Ariely, another psychologist who pretends to be an economist). This is wrong because economists do not assume perfect rationality, only that people seek to maximize value as they see it and that markets reward rational behavior.
It’s not a subtle difference—economists from Adam Smith to Gary Becker made it—but it is often ignored today by writers in the field. Economists have produced a huge volume of research using price and profitability data to document their real “assumptions.” Work based on these “assumptions” is replicable and produces tremendous benefits to consumers and investors every day.
Other People Are Not Better at Deciding What You Want
Good economists are quick to admit they are unlikely to be better judges of what people really want than the actors themselves who must deal with the consequences of making real choices. A great example is fuel economy. The Obama administration, following the lead of previous Republican and Democrat administrations, believed people are too stupid or short-sighted to choose cars and trucks that get better gas mileage, so mandated that car and truck makers produce fleets with higher average miles per gallon than people want.
Sounds good, right? But people choose cars and trucks with lower gas mileage because they value having bigger vehicles (for hauling kids and stuff), heavier vehicles (which are safer), and vehicles with more horsepower (for passing slower vehicles, towing boats and trailers, and yes, getting to places faster than the other guy) more than saving a few hundred or even a few thousand dollars on gasoline over the (uncertain) time during which they own a particular vehicle. How can government bureaucrats possibly know the value of these features to each consumer? Obviously, they cannot.
All this might be of only academic interest if it didn’t affect public policy, but of course it does. In the case of cars and trucks, thousands of people die every year in car accidents that would not have been fatal but for the light-weighting of vehicles to meet the government’s fuel economy rules (called CAFE standards). In this case, Thaler’s “nudge” philosophy is actually killing people every day.
But wait, there’s more. Obama’s “war on fossil fuels” was based on the assumption that people need to be “nudged” to buy renewable fuels, even though such fuels cost five times as much as fossil fuels and are unreliable. Obamacare, Common Core curriculum mandates, and a massive tax code that uses thousands of exemptions and credits to “nudge” us into doing or not doing thousands of different things are more examples of public policies justified by “behavioral economics.”
If We’re All Irrational, So Are the Bureaucrats
In an article about Thaler’s Nobel Prize in Tuesday’s Wall Street Journal, David Henderson wonders why Thaler “has yet to apply in a serious way his theory of irrationality to government officials. Their bad decisions are even worse because citizens bear most of the cost.” It’s a telling point. If “we the people” often seem to make mistakes and act irrationally, isn’t it axiomatic that bureaucrats and elected officials do the same?
Why do bureaucrats at the National Highway Traffic Safety Administration or the California Air Resources Board ignore data showing restrictive CAFE standards kill people? Given that “the worst get on top” in government, as Friedrich Hayek wrote in “The Road to Serfdom” back in 1944, why should we trust any of them to act more rationally than any of us?
In “Nudge,” Thaler and Sunstein called for something they labeled “libertarian paternalism.” Yes, that’s an oxymoron, and it’s almost incredible that two academics who take themselves seriously could have written it and not realized just how stupid their “contribution” to the national debate is.
Here’s what they overlooked: You can’t choose objectives for people and leave them free to choose among paths to reach them while considering yourself a “libertarian.” Goal-setting is part of freedom, maybe the biggest part. Making mistakes and paying the price is, in a free society, called “learning” and “serving as an example for others.”
So congratulations, Mr. Thaler, on receiving the Nobel Prize. Too bad you didn’t earn it.
Correction: While Norwegians award the Nobel Peace Prize, Swedes award the Nobel economics prize. This article formerly conflated the two.