Economics is, at heart, about psychology. It’s about how people react in certain circumstances – namely, when allocating scarce resources. Free-market economics is based on the notion that individuals will behave in certain ways; a large part of my problem with the free market is the ease with which one can falsify those assumptions by providing counter-examples from everyday life. In the UK we donate that most scarce of resources, blood; we don’t sell it. It assumes that we maximise our benefits in a rational way; yet many of the biggest decisions in life are taken without any such careful assessment. And it makes a great virtue of choice.
These values are at the heart of the way our society is run. There is no more powerful buzz-word than choice, promoted by politicians even in cases where (as in the case of selection of secondary schools for children) it is, for most people, entirely illusory. The market is one of the governing principles of life in modern Western societies. If its psychological foundations are shaky, then that tells us something pretty important about our society.
Getting to grips with the reality
That view is examined in a piece in today’s Guardian, which examines the growing science of behavioural economics through the arguments of Dan Ariely, one of its most prominent exponents, and author of Predictably Irrational.
Ariely’s arguments throw down a powerful challenge to the concept of choice. His research suggests that, faced with an increasing range of choice, we make increasingly bad decisions or no decisions at all. In particular, he argues that orthodox market-based economists don’t recognise habits and inertia.
All of this is very much of a piece with the view that the current economic mess is partly due to the fact that the ideology of choice and the free-market fails to deal with important motivations of human behaviour. The market, unaided, has produced a situation where cheap money has financed an unsustainable boom. I suppose some market economists would argue that this is just fine; the word correction, used by some to explain what is happening now, carries that implication. Likewise, the failure to discount the effect on the environment in setting prices can be seen as a rational choice; in the long run, after all, we are all dead.
There’s an old saw, often heard in the City, that market capitalism is about greed and fear. That seems to me to sum up the situation much better than any amount of mathering about the inevitabilities of the market.
The real question, surely, is whether as a society we are prepared to accept the implications of that. I think that, for most rational people, the answer is no; there appears to be a core of irrationality based into this ideology of rationalism.
My own view is that at least part of the popularity of free-market economics is that it allows those with wealth and power to divest themselves of responsibility when things go wrong, and that this is no basis on which to build a sustainable society.