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We need more than nudges

Mainstream economic thought still clings to “rational man” whose actions are always inspired by self-interest and who effortlessly computes utility even over variable timeframes, and uses this model as the basis for the propositions that competition is always good and more choice is always better.

Mainstream economics is socially atomistic. Each man is an island, taking decisions independently of everyone else. Politicians have swallowed this hook, line and sinker and never cease to tell us how everyone has to be responsible for their own savings, retirement and so forth.

Then we get a voice of sanity when Andrew Dilnott recommends that long-term care is funded by the state, with capped contributions from individuals. Nobody seems to notice that this is a socialised solution, not an individualistic one, and represents substantial subsidisation of the poor by the rich.

Experimental economics has shown that people do not take decisions independently. Independent decisions are heroic – they are difficult, have far bigger consequences than we imagine and are far more painful when they go wrong. Instinctively, we know this, which is why we much prefer to go along with the crowd, hoping (usually correctly) that the crowd collectively knows better than we do.

I have argued before that for what are seen as the big financial issues – excessive borrowing, inadequate insurance, under-saving – the solution is not more information or education, let alone more products or competition, but collective enterprises that pull people in, as mutual societies used to do, using moral suasion rather than financial incentives. This does not accord with the interests of profit-seeking financial services businesses, least of all banks. I am delighted to see credit unions are attracting record numbers of new members. They are part of a socialised solution to excessive debt – but they need a lot more help if they are to displace the man from the Provident on the council estates.

I do not regard it as a coincidence that all rich economists are employed by banks and that they all promote the atomised vision of neoclassical economics. These priests of a dead god will continue to intone their black mantras but behavioural, experimental and social economics are beginning to merge and will eventually create a more realistic model based on collective rather than individual behaviour.

Baroness Neuberger, having investigated the efficacy of the “nudges” promoted by economist Richard Thaler and which David Cameron likes, finds they only work when accompanied by legislation and coercion – she cites the introduction of seatbelt legislation as a good example that included all these elements.

To change collective behaviour, you have to have a clear vision of what is needed, set simple rules and explain them over and over again. You have to provide not just personal incentives for conformity and disincentives for nonconformity but, most important, convince people they are doing the right thing. In the end, this has almost nothing to do with economics and everything to do with politics and communication. When politicians claim (usually without any evidence) that economic incentives can achieve the result they want, it is a sign they do not have the bottle for the fight.

The big lesson that politicians have to learn is you can only explain things simply if they are simple. We need a simpler tax system and a simpler financial system – and when the chips are down, simplicity is more valuable to society than fairness.

Chris Gilchrist is director of Churchill Investments and editor of The IRS Report

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. I have to say that I don’t think the sort of compulsion to which Chris refers is really desirable. Compulsion in money matters should be via the State and not via Private Enterprise. In one respect Chris is spot on – Governments don’t have the Gumption.

    If you précis the piece – what he is saying is that the ‘Great British Public’ are as thick as two short planks. Yes I think that’s absolutely correct. To quote Patricia Hewitt when she was Minister for Education:

    “50% of the British public don’t know what 50% means”

    and I think there have been adequate examples both in the public domain and in personal experiences to verify that.

    So where does that leave the bottom line? Tax to fund what is required. Using the Private sector is only a way for mendacious Politicians to pretend they are not increasing taxes. Compulsory contributions to anything ARE tax – whether to Pensions or anything else.

    The rich already subsidise the poor – via the tax system. Indeed as I tell my clients – “You already give large amounts to Charity – it’s called tax”.

    Not only do they subsidise the less well-off through their tax payments, they further subsidise them by having Private Medical Insurance, sending their kids to Private School. And having saved assiduously disqualify themselves from Age Allowance when they get to retirement. There is hardly anything which the State provides to which the better off avail themselves. Police – hmm after recent events! I notice many neighbourhoods now pay for private security firms. Bins being emptied – yes but the better off pay well for this as they pay more in Council Tax than others.

    So whatever way you cut it they pay most to get least.

    What else do you want to soak them for? These are the drivers of the economy, the most intelligent in society, the entrepreneurs, the hardest workers. Please explain why you wish to persist in disincentivising them.

  2. Nearly, but not quite cobblers.

    Or to put it another way, remove distorting state interventions, run sound money, reform the banks to undo the crass mess of the 1844 Bank Charter Act, return freedoms to people to run their own lives etc etc. Or in simple terms learn from the Austrian School insights as to how economies really work best.

    Oh, and he is very confused about neo-classical economics / Keynsianism / Socialism./ Crony Capitalism In short ‘markets’ work. The other things don’t.

  3. A quick clarification:

    You refer to the recent Dilnot Commission proposals as a “substantial subsidisation of the poor by the rich.”

    This description is a reasonable characterisation of the current means-tested system.

    However, the extra funding required by the Dilnot Commission’s ‘capped cost’ model would mostly be spent on the top two pensioner income quintiles, as the Commission itself notes. The Commission has not specified how this should be paid for. But, if the money comes from general taxation and poorer working-age households, then the proposals would perhaps more reasonably be described as a subsidisation of the rich by the poor.

  4. An erudite yet, for all that, typically windy essay from Professor Gilchrist. That having said, I do agree with the general premise that simplification is a desirable goal with which civil servants of every hue seem to have the greatest difficulty. Elsewhere, a colleague proposed a flat tax rate of 10% across the board, with no allowances at all. So the person who earns £10,000 p.a. would pay £1,000 tax and the person who earns £100,000 p.a. would pay £10,000 tax. Maybe 10% is too low a rate, but 15% might well be workable, reducing dramatically not just the costs of HMR&C but the costs of going after people who haven’t paid what they should. It would also save vast quantities of paper.

    As Henry Thoreau said: Our lives are frittered away in detail. Simplify, simplify!

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