‘Nudge’:
The Second Counter-Revolution
in Economics (and Politics)
The award of the Nobel prize to Richard H. Thaler "for his contributions to behavioral economics" confirms that the turn introduced into economic science and, indirectly, all social sciences, by the so-called neoclassical marginalists in the late 19th century –sometimes called “Marginal Revolution”-- is over. We are back to classical political economy, as founded by David Hume and Adam Smith in the 18th century.
Marginalist microeconomics held that we could understand collective outcomes by assuming that they derive from free interactions among homines economici.
Marginalist microeconomics held that we could understand collective outcomes by assuming that they derive from free interactions among homines economici.
A first big counter-revolution was the reintroduction of institutions in the basic analysis, especially since the 1980 and 1990s (including by Nobel laureates related to the social choice and public choice schools such as Kenneth Arrow, James Buchanan, Ronald Coase, Douglass North, Amartya Sen, Thomas Schelling, Leonid Hurwicz, Roger Myerson, political scientist Elinor Ostrom, Oliver Williamson, and others).
The second is the reintroduction of realistic observations about people’s motivations and behavior, including emotions. This has been based on psychology, on the background of huge progress in neuroscience (while pioneers include political scientist Herbert Simon and psychologist Daniel Kahneman). That Richard Thaler professes at the University of Chicago, once the temple of the neoclassical school, shows the depth of the change.
Now we know again that the three pillars of social analysis are, together with people’s calculated self-interested choices, emotions and institutions, as Hume and Smith masterfully had already established.
Thaler’s most popular book, co-authored with law scholar Cass Sunstein, is titled Nudge, a word defined by dictionaries as a slight or gentle push or jog, especially with the elbow, to get someone's attention or prod someone into action. For “behavioral economists”, relevant “jogs” to explain human decisions include framing the available alternatives, anchoring the choice, the appealing of the status-quo, aversion to loss, aversion to the future, and others.
These tools have proved to be highly consequential for policy-making. The U.K. and the U.S. governments have offices working in this approach to design and launch some of their policies. Very impressively, two years ago the World Bank published a broad report on policy-design and implementation focusing on these tools: Mind, Society, and Behavior. The review covers fields such as loan and credit markets, college applications, traffic accidents, as well as major policies on poverty, productivity, health, and climate change.
The potential for also revising typical political science issues is exemplified in the World Bank report with an electoral reform in Brazil that simplified its voting ballots. According to the authors, “then more poor, illiterate, and semiliterate voters could cast proper ballots. With more votes of the poor counted, more candidates from pro-poor parties were elected in state legislatures, which shifted state spending toward public health care. As a result, the number of uneducated pregnant women with regular prenatal visits increased and the number of low- weight babies at birth fell, paving the way for better adult health.” Just an example.
Thaler predicts that “behavioral economics will succeed so well that it will eventually disappear… and all economics will be as behavioral as the topic requires.” Together with institutions, which are the bridge between markets and governments, we will be back to classical political economy.
http://jcolomer.blogspot.com.es/2017/10/nudge-second-counter-revolution-in.html