At its best, economics is the study of what makes people better off, and how they can have more of it. To be effective, though, economists may have to tackle a tougher question: what “better off”‘ really means.
For much of the past several decades, mainstream economics operated on the ambitious assumption that humans as a whole were perfectly rational, and would hence always do what was in their aggregate best interest. More recently, behavioral economists have made a lot of progress in disabusing their colleagues of that notion, as Richard Thaler describes in his book ”Misbehaving: The Making of Behavioral Economics.” The result has been a lot of useful policies that take into account people’s irrational biases. The Obama administration, for example, has employed timely text and e-mail reminders to boost college enrollment and student loan repayment rates.
The behavioral approach, though, goes only so far. As the economists Karla Hoff and Joseph Stiglitz argue, it still focuses on people’s preferences as the measure of their economic success. If they’re getting what they want, the logic goes, they must be better off. In this way, the behavioral revolution adheres to the convention that economics should be value neutral, avoiding any discussion of the forces that lead people to desire certain outcomes over others. This, say Stiglitz and Hoff, makes it useless as a guide for policy in situations where people’s values are the problem, which is actually quite often.
Consider, for example, banking. Financial scandals occur not because bankers are incapable of maximizing their utility, but because their desired outcomes are often at odds with those of society at large, or even the firms where they work. This is a problem of values. Last year, psychologists found that bankers tend to act more dishonestly if they’ve first been primed or reminded of their professional identity, suggesting that selfishness is an integral part of the culture in which they operate. Hence, mere rule changes are unlikely to prevent them from doing what, in their view, makes them better off. It’s the values and preferences that need to be changed.