Thaler’s Non-Revolution in Economics

James R. Rogers writes about Richard Thaler and behavioral economics:

[M]edia treatments of Thaler’s work, and of behavioral economics more generally, suggest that it provides a much-deserved comeuppance to conventional microeconomics. Well . . . Not quite….

… Economists, and rational choice theorists more generally, have a blind spot, [Thaler] argues, for just how often their assumptions about human behavior are inconsistent with real human behavior. That’s an important point.

Yet here’s where spin matters: Does Thaler provide a correction to previous economics, underscoring something everyone always knew but just ignored as a practical matter, or is Thaler’s work revolutionary, inviting a broad and necessary reconceptualization of standard microeconomics?…

… No. He has built a career by correcting a blind spot in modern academic economics. But his insight provides us with a “well, duh” moment rather than a “we need totally to rewrite modern economics” moment that some of his journalistic (and academic) supporters suggest it provides….

Thaler’s work underscores that the economist’s rationality postulates cannot account for all human behavior. That’s an important point. But I don’t know that many, or even any, economists very much believed the opposite in any serious way. [“Did Richard Thaler Really Shift the Paradigm in Economics?“, Library of Law and Liberty, October 11, 2017]

I have made the same point:

Even in those benighted days when I learned the principles of “micro” — just a few years ahead of Thaler — it was understood that the assumption of rationality was an approximation of the tendency of individuals to try to make themselves better off by making choices that would do so, given their tastes and preferences and the information that they possess at the time or could obtain at a cost commensurate with the value of the decision at hand.

Highly recommended reading: my previous post about Thaler and the many related posts listed at the end of it.

Columnist, Heal Thyself

David Brooks’s recent column, “The Protocol Society,” is a typical Brooksian muddle, in which he attributes evolutionary changes in economic behavior to the “discoveries” of contemporary economists.

Despite Brooks, there is nothing new under the sun of economic analysis. The practitioners of today who draw on sociology and psychology are simply returning to the roots of economics — the description of human behavior — which can be found in Adam Smith and his successors, well into the 20th century. This “old school” of literary economics didn’t give way to the “new school” of mathematical economics until after WWII, when Paul Samuelson led the profession down the dead-end street of convoluted, abstract theorizing.

The difference between the old-old school and the new-old school is that the moderns rely less on introspection and casual observation and more on data collection, “laboratory” experiments, statistical analysis, and the research findings of sociologists and psychologists. That this is not an unalloyed blessing can be seen in the “accomplishments” of a leading member of the new-old school, one Richard Thaler, whom Brooks omits to mention. Thaler’s specialty, which has been dubbed “behavioral economics,” focuses on the psychology of decision-making and how it leads individuals to make what Thaler believes are sub-optimal and even unwise choices. From there, Thaler and his collaborator, Cass Sunstein, have ventured into normative policy recommendations, which they dub “libertarian” or “soft” paternalism. Needless to say, actual libertarians find much to criticize in Thaler’s normative prescriptions, which carve out a role for government in “nudging” people in directions that “wise men” like Thaler and Sunstein would like to seem them nudged.  For much more about the dangers of “libertarian” paternalism, see these two posts and follow the links therein.

In any event, Brooks writes as if there were a real difference between economic activity in the 19th century and economic activity in the 21st century. As if, for example, there wasn’t a lot of brainpower and organizational skill involved in the “second industrial revolution” of the last third of the 19th century. As if, to take another example, the “protocols” of the modern food court didn’t have their counterparts in the market squares of yore. As if, to take a final example, the manufacture of steel, autos, and other durable goods doesn’t (and didn’t) involve massive capital investments (many of which were made possible by patented processes and machinery), so that the average cost of making each unit declines markedly as the rate of output rises. It is as if the 21st century simply arrived, bright and shining, with no connection to the past.

On the whole, Brooks is onto something, which is that economists are getting back in touch with the realities of human behavior. However, he is guilty of a gross attribution error. He writes as if there were something new in economic behavior because economists are now better able to describe it. The same attribution error is found among teenagers (of every era), who believe that sex didn’t exist until they discovered it.