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