Behavioral Political Economy
Richard Thaler is the 2017 Nobel laureate in economics for his work in behavioral economics. This comes 15 years after the prize was awarded jointly to Daniel Kahneman for pioneering economic psychology and Vernon Smith for pioneering experimental economics. As the discussion unfolds, we should remember that “people are rational” is a starting point — a simplifying assumption for building models of human interaction. It is not a description of human interaction. So when lab and field experiments show evidence of people acting irrationally, this is not an indictment of economics but instead it is learning about economic models. Likewise, people acting irrationally is not an invitation for policymakers to correct people’s choices. After all, policymakers are people too, so perhaps they don’t act rationally either.
Mario Rizzo draws on his decade-plus of work with Glen Whitman to deliver this same point with greater subtlety.
It is one thing to construct clever experiments in which people do “odd” (unexpected by the standard paradigm) things. It is another to show that they engage in behavior in the real world that is ecologically inappropriate or that leads to self-defeating behavior. “Odd” behavior should be viewed as an invitation to probe more deeply rather than to condemn. Explanation is hard; evaluation can be easy and cheap.
Even among economists, there is much dissent. Look at the work of Vernon Smith, another Nobel laureate in economics, whose experimental economics has pushed us into a recognition that the errors or imperfections of individual decisionmaking need not result is poor outcomes — if the institutional structure is good. Smith has carried on the tradition of the Scottish Enlightenment which emphasized time and again the compatibility of imperfect men and outcomes that embody far more “intelligence” than any of them have as individuals.
Niclas Beggren complements this in his systematic survey of the literature, “Time for Behavioral Political Economy?” (2012 Review of Austrian Economics):
Abstract: This study analyzes leading research in behavioral economics to see whether it contains advocacy of paternalism and whether it addresses the potential cognitive limitations and biases of the policymakers who are going to implement paternalist policies. The findings reveal that 20.7% of the studied articles in behavioral economics propose paternalist policy action and that 95.5% of these do not contain any analysis of the cognitive ability of policymakers. This suggests that behavioral political economy, in which the analytical tools of behavioral economics are applied to political decision-makers as well, would offer a useful extension of the research program.
Also see Glen Whitman anchoring this 2010 discussion in Cato Unbound.
There is so much more to Thaler’s work than the set of nudge policy implications. The inimitable Alex Tabbarok [here] and Tyler Cowen [here] provide breadth and depth of introduction.
My own contribution to this areas of work tests for one particular behavioral “anomaly”, endowment effects, in the context of the most common public goods experiment environment, namely the voluntary contribution mechanism. Available here.