Contrary to much of what has been written in response to Richard Thaler’s recent Nobel Prize in Economics, the decision to award him the prize did not challenge the hegemony of mainstream, neoclassical economics (as an aside: the award itself is controversial, Swedish bankers seeking to undermine socialist democracy invented it; Alfred Nobel never thought there should be such an award). Giving the award to Thomas Piketty, on the other hand, would have.
Behavioral economics contends that economic agents — contrary to orthodoxy theory — do not always behave in ‘rational’ ways. Human beings base their decisions on “biases” or “heuristics.” For example, behavioral economists argue that we tend to overvalue things we already own. This is known as an “endowment effect.”
The experiments conducted by behavioral economists are anecdotally illuminating, but there are good reasons that mainstream economists have mostly embraced it, despite the fact that it supposedly demolishes their precious models of rationality.
This is because both behavioral and mainstream economists share the same methodology of extreme individualism. Much like their orthodox brethren, behavioral economists tend to ignore power relations, history, institutions, etc. Human actors remain atomized calculators, floating around an egalitarian and ahistorical space, articulating their agency by ranking preferences and making choices.
So what then is the main goal of behavioral economics? Well, it’s mostly to use these “predictably irrational” and model-able biases in order to debug human beings through “nudges” so that we will, in the end, act in a more rational manner like the neoclassical models describe. As such, through its mild criticism and minor tweaks, behavioral economics actually buttresses mainstream economics far more than subverting it.
The basic methodological (and one might argue ideological) affinities that behavioral economics shares with the rest of its discipline insures that it offers no real alternative to mainstream economics. Rather than truly upending traditional economic thought, Thaler and his cohort have, ironically, merely nudged it. Examples from his own best-selling book co-written with Cass Sunstein, makes this point clear. A large portion of Nudge examines issues of saving, investment, and credit. This part of the book opens by lamenting the fact that Americans’ propensity to save has been dropping for years. Yet,rather than examine stagnating wages, skyrocketing inequality, diminishing expendable income or the rise of a working poor with no pension benefits, the book mostly looks at how implicitly middle class Americans with good, corporate jobs and job security pick and choose their 401-(k)s.
Nudge examines how Americans choose their stock portfolio — yet again the focus on individual decision-making ignores the basic fact that most people cannot exercise choice over investment because they hold no assets. Recent estimates show that roughly 80 percent of the stock market is owned by the richest 10 percent of Americans — but you wouldn’t know that from reading books like Nudge. In fact, for a book that spends a great deal of time talking (quite brilliantly at times) about the crucial role of “choice architects” who shape the menu of options presented to Americans on a daily basis, Nudge offers few hints that the biggest “choice architects” of all are historically and socially determined conditions such as whether you were born male, rich and white.
The focus on individual choices inevitably leads to conclusions and policy proposals that ignore the bigger, structural, institutional and historical social issues that shape Americans’ lives. We absolutely should not diminish the positive impact of the proposed “nudges” that Thaler and other behavioral economists offer up in their work, be it by creating default pension options, healthier food menus, or opt-out organ donor policies. Nevertheless, what the American economy — and American economics — really needs right now is a series of big shoves — not mere nudges. Thinkers like Thomas Piketty, and their studies on how massive levels of wealth inequality are threatening the democratic institutions of the country, do just that. Therefore, they are more deserving of the Nobel Prize in Economics — even if it is fake.
Eli Cook is an Assistant Professor of American History at Haifa University and the author of The Pricing of Progress: Economic Indicators and the Capitalization of American Life.