Fantasy economics

One of the most important recent ‘discoveries’ in economics is not about either growth or jobs. It is about people. We have discovered that we are not actually the logical, cool, and selfish people that economic models often assume we are. In fact, we are so full of feeling-affected judgements and actions that a whole new field of economics has had to be developed: behavioural economics.

To be fair, across the centuries, philosophers and others considering the human condition have often pointed out that logic does not dictate human behaviour. Although it is not new to think of ourselves as passionate, it is relatively new to accept that reason does not completely control our non-logical selves. Perhaps one of the main changes is discarding the expectation that we can educate ourselves into being guided solely by reason. Some may consider this to be regressive, but I would say it is a better reflection of how we make our daily decisions.

We are social animals

So, what are some of the conclusions from this merging of behavioural science and economics? One of my favourites is that people seek fairness – and not only for ourselves but so that the system remains fair. And that we are altruistic: we like to give of ourselves. In fact, programmes to encourage giving to the community backfire when they add a financial incentive: when a task becomes a low-paid job rather than a gift, it loses the sheen of the generous gift for others.

We are motivated to do the ‘right’ thing and to fulfil our own expectations of ourselves. Do you think of yourself as generous? Then you might give donations that are not ‘rational’ (i.e. in our personal self-interest). This describes most of the people I know:  I am disappointed when, on the rare occasion, someone I know behaves like the cold-heartedly self-interested money-focussed logical thinker that we are told is normal (and even desirable).

It reminds me of long-ago biology classes and the desire to find a selfish (e.g. gene-perpetuating) reason for behaviour by animals which helped others to their own disadvantage. Imagine a world in which we are not surprised and slightly suspicious of altruistic behaviour. In fact, it has been argued in psychological terms that caring for others without thinking only about oneself is not at odds with evolution for humans.

Most of us hate change

But behavioural economics is about more complexities than just people being kinder and more social than we assume. We are also less rational – for example, we will often stick with an arrangement that we know is not the best, just to avoid the hassle of making a change. In fact, we fear loss, no matter how small. We keep our insurance provider despite there being a better alternative product. We stick with our single-glazed windows although we know we’d save money in the medium term if we changed them. And we tend to go along with what others are doing. In Ireland during the property ‘bubble’, I watched people make decisions that were far from rational, jumping on the bandwagon of buying houses at exorbitant prices. My outsider’s voice calling that mortgages of six times one’s salary are not reasonable, was drowned out in the thunder of the crowd rushing to the mortgage lender.

Behavioural economics is being used now to design policies which might encourage consumers to change their behaviour and make choices more in line with a sustainable lifestyle. But perhaps social sciences have more to guide us than simply manipulating behaviour. Others have pointed out that irrationality works, and the evidence is the survival of the human species. Yet, we have been persuaded that people are rational or at least should strive to complete rationality. Of what other unfounded fantasies have we been persuaded? How about endless economic growth being the only way to keep bread on the table?

As someone with a philosophy of simplicity, the desperation to find new sources of energy is a good example of how people are not rational. We know we are using too much energy; we know our energy use is causing catastrophic climate change everywhere in the world. Films have been made, and rather sour jokes as well, about the effects of rising sea levels. Ireland, where I enjoyed mild and rainy winters, may become a victim of its northerly latitude, should the Gulf Stream stop or be reversed. There may be dispute – although see this exposé of shady funding for anti-climate campaigners – but the facts are clear. So what do we do about it? We talk about the cost of insulation and the slow development of efficient solar panel technology. But our shops and businesses and homes are still heated more than is neccessary. Most of us still fly on our holidays. The shops are full of asparagus flown in from Peru and roses from Kenya. We do not respond to this major threat in the strategic and urgent manner that would indicate rationality.

Individuals might feel overwhelmed by the immensity of the challenge before us, and people have also been shown to prefer the ‘devil they know’. This holds true apparently even for institutions. The European Commission speaks about the Green Economy but don’t define it in a useful way. And they have recently launched a consultation on shale gas (fracking) with a questionnaire which is biased in favour of permitting fracking in Europe. A roadmap has been published which is dated prior to the consultation. Nowhere is the need for reduced energy use visible. The Commission’s questions seek ranking of benefits, from energy independence to reduction of cost to the consumer. It asks which controls might be needed – including, for example, controlling the release of methane. This solution is impossible. Experience in Pennsylvania, where fracking has been going on for several years, indicates that soil structure is damaged and methane may be released directly into the air. It is fantasy – but it makes us feel better about taking the (easier) option of not decreasing our energy use.

Another suggested control is to ensure fracking operators have sufficient assets to cover emergencies. This implies that any damage to the environment could simply be covered by finances. When will we learn that, although we base our economic activity on the natural world, it cannot be put back together with a technological fix?

Until we understand our own desire to have easy fixes and be able to choose the route of continued luxury, we will never make the hard choices that are essential to our being able to continue to survive in the natural world in which we find ourselves.

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