The Shortcomings of Behavioral Economists

by Pejman Yousefzadeh on July 29, 2012

I am an adherent of the Chicago School of economics, but that doesn’t mean that I don’t appreciate the insights of other schools of economic thought. Keynesianism certainly provides an appealing theory regarding what to do in an economic downturn–engage in more fiscal stimulus to increase demand. The problem, of course, is that politics intrudes; instead of formulating and implementing fiscal policies designed to have the maximum stimulative impact, politicians formulate policies that will maximize the amount of pork that goes back to their constituencies, irrespective of whether those policies bring about the ideal fiscal multiplier effect needed to bring about the desired rate of economic growth. And I appreciate the chief criticism of the Chicago school, the one that states that it might be a rather dangerous thing at times to assume rationality on the part of the consumer when the consumer makes choices.

That criticism is leveled primarily by adherents of the behavioral school of economics. Behavioralists have lots of interesting theories and insights, and one of the great things about advances in neuroscience and neuro-imaging is that we are able to put a lot of those theories and insights to the test in what are as close to ideal experimental conditions as we can imagine. And credit where it is due; behavioral economists have produced interesting theories that legitimately call into question the ability of consumers to be rational in certain situation. I don’t think their findings show that consumers entirely lack rationality, and I believe that Chicago school theories continue to have exceedingly valuable explanatory power. But it would be folly for either school to ignore the other, and certainly, responsible Chicago school economists and theorists ought to engage their behavioralist counterparts in a respectful, passionate dialogue that hopefully will help spawn a host of new theories with significantly more explanatory power; theories that will be of tremendous help as we work to more fully understand economic laws and as we work to formulate and implement the kind of economic policies that will bring about growth for as many people as possible.

All of that having been written, it seems to me that behavioral economists ought not to ignore significant and legitimate challenges to their own world views. Tyler Cowen highlights a particular shortcoming of behavioralists; they are noticeably willing to prescribe paternalist economic policies, and quite emphatically unwilling to try to find out whether the paternalist policymakers in question are smart enough to be in charge of prescribing–and perhaps implementing–those policies.

Of course, few people should really be surprised by this finding. Small-government activists have long chuckled at the thought that policy advocates at the governmental level are somehow smart and wise enough to run our lives with expansive governmental actions backed up by expansive governmental power. The wisdom of crowds and the phenomenon of spontaneous order always seems to do a better job of helping us figure out what to do than do policy mandarins of any stripe. But it is valuable to have yet another data point in favor of the proposition that mandarins cannot outperform crowds and spontaneous order. It is especially valuable to have that data point also inform us that behavioralists don’t seem to care whether those mandarins actually are, you know, smart and wise enough to enter that competition in the first place.

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