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.
As an example of what’s possible, Stiglitz and Hoff point to a company in Brazil that used television to bring about a reduction in fertility rates. Rather than invoking any cost-based incentives, the company produced soap operas in which families had few or no children — to counter prevailing social norms about the need for large families. Fertility began falling within the first year in cities with access to the shows, suggesting that the program successfully changed peoples’ values.
The point is that societies — or parts of them — all too easily get trapped into dysfunctional social norms and self-sustaining patterns of behavior. People may maximize their utility in some crude way when over-consuming sugary soft drinks or smoking three packs of cigarettes a day, but that’s only in the context of their current preferences. The whole point of advertising is to create desires for products, or to shift them from one product to another. Taxes can help sway behavior, but they leave preferences unchanged. Policies to reduce obesity, smoking or other behaviors relevant to public health cut themselves short if they ignore values and focus only on the calculus of cost and benefit.
The problems of climate change and environmental degradation are further examples. Economic thinking — conventional or behavioral — can make solutions seem more costly than they really are, because it takes humanity’s preference for extreme material consumption as a given. It assumes that policies won’t change how people behave or what they desire — a sadly unambitious vision of what might be possible. In so doing, economics essentially refuses to consider some of the most powerful means for achieving social transformation.
By bringing some ideas from psychology into economics, the behavioral revolution has undeniably done the world a service. That said, economics also has a lot to learn from sociology and anthropology, areas of social science concerned with how values and social norms emerge — that is, how people decide what makes them better off. Like it or not, there is no objective, value-free perspective on the human condition.