Tuesday, 17 October 2017

The Just and the Unjust

Over the long arc of history, behavioural economics will be seen as an attempt to explain the difference between the theories of rational expectations and efficient markets on the one hand, and messy reality on the other. It does not challenge the premises of neoclassical or neoliberal economics but seeks to explain how these are warped by cognitive biases. While these biases are real, there is signficantly no unified behavioural theory despite the formalisation of behavioural economics as a sub-discipline. Like the addition of "happiness" to the calculation of social policy, and the anthropological turn in the study of financial markets after 2008, it is a form of apologetics focused on necessary adjustment and auxiliary support. That it should have become so prominent, to the point that Richard Thaler was this month awarded the Nobel Memorial Prize in Economic Sciences, might suggest that neoliberalism is on the defensive, but a better interpretation is that it reflects the intellectual ossification of neoliberal theory since the 1980s and the shift of its practice towards an increasingly conservative register, a shift that was already well advanced when Daniel Kahneman was awarded the prize in 2002.

It's no accident that the application of behavioural economics, such as the idea of the "nudge" (popularised in the book of that name by Richard Thaler and fellow-economist Cass Sunstein), has tended towards the service of socially conservative ends, despite the claims made for "libertarian paternalism". In the case of the UK government's Behavioural Insights Team (aka "the nudge unit"), established in 2010 by the Conservative-Liberal coalition, the focus was on improving rates of small-scale tax collection and the payment of fines among the general population at a time when HMRC was revealed to be cutting sweetheart deals with multinational businesses and rich individuals. It is also revealing that examples of successful "nudges" tend to be either the repackaging of time-worn wisdom - e.g. that inertia makes an opt-out a better approach than an opt-in - or trivialities that make for amusing stories, such as the famous urinal flies. The question ought to be not whether nudging works but whether significant aggregate benefits arise from nudging that wouldn't otherwise accrue from a simple default setting (or better design, in the case of urinals). In other words, is a nudge any better than a shove?

Henry Farrell has made the point that nudging typically neglects the need for self-correction, which in the context of social policy usually means the absence of any democratic mechanism that would allow flaws to be addressed. Given the tendency of social policy nudges to focus on the majority of the population, rather than problematic but identifiable minorities, this lack of a channel for popular feedback seems perverse. This is not simply a result of technocracy (i.e. the belief that experts know best), but the application of a behavioural approach that presumes we don't really know our own minds (or are simply lazy and unthinking). Farrell also makes the point that nudging is the flipside of commercial practices that seek to hinder customer choice ("hassles"), such as making it difficult to unsubscribe from a service or terminate a contract (in fact, some nudges are simply the result of removing commercial practices thoughtlessly extended to public services, such as the clutter of advertising). As such, nudging is part of the "hidden persuaders" tradition of marketing and public relations that goes back to Edward Bernays a century ago (it is worth noting in passing that the most marketing-oriented US President in history is currently trying to undermine Obamacare through a series of "hassles").

At this point you might wonder what distinguishes the libertarian paternalism of Thaler and Sunstein from benign dictatorship or even the social democratic model in which elected representatives commission and oversee technocrats who make choices for society at large. The answer is that while nudging seeks to influence the behaviour of the majority it avoids imposing itself on the well-informed minority - i.e. those with the intellectual capacity or pre-existing social capital sufficient to make optimal choices in respect of their personal utility. To put it another way, nudging is for the herd and laissez-faire is for the elite. This reflects the truth, long obscured by the neoliberal rhetoric of choice as a right, that what wealth entails is freedom from the pain of choice. When you have enough money, you don't have to make so many hard choices and the cost of bad choices can usually be more easily mitigated. The "choice architectures" promoted by the behaviourists focus on those with less agency for whom the risks of a bad choice (and thus the indirect cost to society at large) are greater, such as workers reluctant to participate in private pension schemes or the mass of the population who thoughtlessly fail to volunteer their organs for transplant on death. For the wealthy and powerful, the language of incentives and just rewards (i.e. positive discrimination) remains dominant.

A central plank of market theory, and a key driver behind the idea of deregulation, is Coase's Theorem. This holds that participants in a negotiation over social costs (what are known as "externalities") have an equal interest in an optimal outcome, but that this can be made sub-optimal by state intervention (which creates additional "transaction costs"). For example, a community affected by a local factory's pollution might prefer financial compensation to regulation that seeks to prevent it. However, this assumes that the participants also have an equal capacity to negotiate, which ignores informational asymmetry and raw power (e.g. the community may not know the full health risks of the pollution or the factory may threaten local workers with redundancy). Behavioural economics concedes the general point of asymmetry, but it does so by emphasising the personal factor of cognitive bias while occluding the social factor of power (it is, fittingly perhaps, biased). By doing this it divides society into the enlightened and the unenlightened, rather than the powerful and the powerless. The former (the choice architects) can then support the latter to behave in a rational, utility-maximising manner, without questioning the basis of their superior capacity.

Behavioural economics is also an upgrade on the permanent self-improvement advocated by neoliberalism since the 1970s: the idea that you can become whoever you want to be and that all your limiting beliefs and incapacities can be addressed through the disciplining of the intellect, body and emotions. On the face of it, the idea that our choices are warped by cognitive biases suggests that we are slaves to our human natures and might as well just accept that perfection is beyond us, but central to behavioural economics is the idea that not only are these biases simple to understand for a general audience (their treatment in the literature often relies on parables) but that they can be positively offset by individual effort, hence Daniel Kahneman's Thinking, Fast and Slow has become as important a self-help manual in this decade as Jane Fonda's Workout was in the 1980s. What hasn't changed is the linked ideas that you remain personally responsible and that inequalities of social and economic power are irrelevant to your circumstances. In other words, behavioural economics shares the lineage of Protestantism that has conditioned neoliberalism. Despite its accessible style, it tends towards a Calvinist scepticism about free will.

Though behavioural economics questions the efficiency of "choice", it does not challenge the a priori claim that choice is a fundamental good that should be extended where possible, nor does it suggest that bad choices are inevitable. The central idea of "nudge" is that the quality of aggregate choice can be improved without challenging Hayek's idea of dispersed and fragmentary knowledge or undermining the value of cognitive diversity. In one sense this is merely choice theatre (e.g. the constructed market for energy supplier switching), so you might ask why we don't just cut to the chase (nationalise the utilities), but this would mean an ideological retreat from choice: more shove than nudge. The aim of behavioural economics is not to redraw the line between the realms of market and society but to suggest that we can ameliorate market imperfections through the structural guidance of expert choice architects who operate independently of society. In Polanyian terms, behavioural economics is a pseudo-double movement.

The purist libertarian position holds that people have a right to make bad choices. This is rationalised by the idea that in aggregate we still arrive at the best outcome for society because many more people make good choices: the irrational is crowded out by the rational. Behavioural economics suggests that this might not be true because the irrational may, in certain circumstances, outweigh the rational or at least significantly compromise optimality. In other words, there aren't enough smart people to offset the stupidity of the mass, which again points to the conservative timbre distinguishable in the background music of this style of reasoning. Randian libertarians and reactionaries don't have a problem with this pessimistic analysis, being solipsistic misanthropes in the main, but you can see why it might make conventional liberals uncomfortable, and consequently why the emergence of behavioural economics has coincided with the revival of ideas such as epistocracy - i.e. rule by experts - that seek to ameliorate the "flaws" of democracy. In short, behavioural economics continues to separate humanity into the just and the unjust, the elect and the damned.

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