Various arms of government are tentatively beginning to ask what they can learn from behavioural economics. There seem to be two principle reasons for this. Firstly, there are various policies that aren’t quite achieving what is hoped of them because individuals aren’t responding to the incentives as neo-classical economics states they will. Then there are the various problems that government is lumped with – obesity being the most prominent one right now – which arise because of people taking ‘irrational’ decisions in the marketplace. Behavioural economics promises to integrate empirical psychology into the analysis of decision-making, though in doing so, threatens to make human behaviour impossible to model (as of course it actually is).
What is fascinating about this learning process is how ambivalent it is. Policy-makers want to learn useful lessons from behavioural economics, but not to learn sufficient lessons that the neo-classical edifice is fatally damaged. I was struck by this recently, when I came across this interesting paper by the National Consumer Council and the Better Regulation Executive, ‘Warning: Too Much Information Can Harm’ [pdf]. Page 24 contains the following proposal: In many markets, government’s aim in providing regulated information is to inform consumers about their choices without steering them to any particular choice. By contrast, the work carried out by economists and psychologists suggests it is impossible to provide information or frame choice in an entirely neutral way… Attempts to render the information neutral can be counter-productive if they sterilise the information to the point in which it is no longer of relevance to the consumer.
Buried in here is a paradox: it turns out that treating people as rational utility-maximisers does not enable them to take rational, utility-maximising decisions. Instead, this report appears to be suggesting, government should recognise that they can only take a rational, utility-maximising decision if they are offered some help. All options are equal, but some are more equal than others.
With a grain of theoretical consistency, the neo-classical edifice would collapse at this point. The discipline is founded on a belief that consumers must be free to choose between rival suppliers, in order that the price mechanism functions properly and goods are then allocated as efficiently as possible. Take away that freedom of choice, and everything else starts to crumble and a planned economy beckons.
Ah, but there is a third way! If the ‘Warning’ report is a hint…