Sunday, 28 October 2007

The politics of behavioural economics

Behavioural economics is an increasingly influential field that is already having some application in both the City and in some areas of policy. For an example of the former, some fund managers have run training sessions that seek to help portfolio managers improve their decision-making (by making them aware of biases). And an example of the latter is some of the analysis in the Pensions Commission report and in the Pensions White Paper which has fed into the ongoing development of Personal Accounts, namely the auto-enrolment approach to membership. This is based on the understanding that failing to join a pension scheme is often (not always) the result of inertia rather than a conscious decision not to join.

I personally find this a really interesting area, but what really surprises me is the apparent lack of interest from those on the Left. I say surprising for a couple of reasons. The first is that behavioural economics in part seeks to establish how people act in practice, as opposed to how economic models suggest that they should act (ie homo economicus). As such it undermines some of the fundamental assumptions of free-market ideology both in terms of economics and human behaviour (although it should be stated that this is not its objective). Secondly, on a purely tactical level, insights from behavioural economics could be used to build the intellectual case against some policies that the labour movement finds problematic, such as the extension of "choice" in public services.

However, to date, as far as I am aware, the Left in the UK doesn't really seem to have grasped the opportunity. The only serious work I am familiar with is an attempt by Which? (ex Consumers Association) to look at choice and public services. I went along to a seminar they ran on the subject a year or two back that was really interesting and attracted quite a lot of civil servants. Around the same time the great Barry Schwartz book The Paradox of Choice was apparently a popular read in policy circles. But there didn't seem to be much interest from the unions then I haven't seen anything since.

I think that this is a missed opportunity, and risks leaving the labour movement stuck in an unproductive anti-choice position. As much as many on the Left are uncomfortable with the idea, if you ask the average punter if they want a choice (in schools, hospitals, pensions etc) they overwhelmingly say "yes". But what behavioural economics shows us is the chasm between what people say and what they do is rather large. And in many circumstances they find the choices they are presented with to be too complex. In many cases, the more choice there is the less likely the individual is to choose. And in public policy the ramifications of choice can be much more significant than in the commercial sector.

My choice of whether to have a pizza or a curry for dinner obviously has less of an impact on me over the course of my life, than my decision whether to save into a pension, or how much to save into it, or where to invest it. Yet many advocates of "choice" fail to make such distinctions. Choice for them is an unqualified good, and whilst there is no attempt to build an intellectual case against the blanket adoption of choice as a policy response their views may hold sway.

It's not just in the area of choice where behavioural economics has useful insights. I would also highlight some of the research into the misinterpretation of statistics, failure to take account of mean regression etc. For example, league tables may provide information that the punters misunderstand. Clearly some of these points are more familiar and some policy people on the Left do apply some of them. But by and large this is still a non-political area.

So my argument is that basically that we should nick it for ourselves. As I have said it provides useful tools to counter the extension of market principles to areas where this is not appropriate (this will clearly vary depending on your politics). But more broadly if the Left wants to remain relevant it needs coherent ideas about both economics and policy reform. I think that behavioural economics is going to play an important role in policy going forward, so we should seek to incorporate the insights it provides into our thinking rather than rely on past assumptions that have not proven so reliable in practice. Behavioural economics shows that the model of the self-interested maximising rational individual is flawed. That means that policy which is based on that model is also flawed. We should be using this as an opportunity to develop alternative approaches.

6 comments:

Charlie Marks said...

It's interesting, I suppose. Certainly I've heard social democrats in other European countries talk about behavioural economics, but I have a limited interest in bourgeois economics and this just seems to be another kind...

So, I'd go further. We don't only need some control over the public services we use, we need both control in the workplace and over the production process. Which is to say power as producers and consumers of goods and services.

But as long as most of the trade unions have leaders committed to partnership with employers and financing the Labour Party, talk of workers control is bound to make you look like a nutcase.

As to the question of choice - the result of "choice" in transport, gas, water, telecommunications, and electricity since privatisation hasn't been all that great. Making the link between the neoliberal choice agenda and the extortion of the energy companies isn't too difficult.

Tom P said...

Hi Charlie

Obviously I am primarily interested in how behavioural economics applies to the world we face today. But it might be possible to develop a marxist strand to this. That might involve admitting that psychological factors can play a bigger role in decision-making and views than material forces or relationships to the means of production though.

I don't see the problem with partnership between employers and unions if it delivers for union members. I know I'm a sell-out moderate (!) but you could even argue that game theory might suggest that partnership is a good strategy for unions to take. One for another day maybe?

I agree with about choice in utility 'providers', you could add the 'liberalisation' of directory enquiries to that list too. But what about other choices? If a marxist (or marks-ist) regime took power would you allow a choice of cars? How will you deal with the consumer goods that the population will still want?

I've actually been thinking that advances in IT etc have actually made central-planning more viable in some areas. In addition you could use your marxist behavioural approach to approve the decisions and actions of your Gosplan equivalent. But I still think an entirely planned economy is deeply flawed as a strategy.

Charlie Marks said...

Don't confuse planning with central planning - I think you can have democratic and decentralised decision-making. Technological advances should allow consumers to have a greater say in the design of goods and services - so of course you'd have a choice of cars in an economy in which participatory planning was dominant.

You might be interested in the writings of Michael Albert and Robin Hahnel on participatory economics or Pat Devine on participatory planning.

As for partnership between unions and employers... the RMT, which is one of the most militant unions is also one of the fastest growing. Partnership hasn't delivered the goods for members, nor has the link with Labour.

Tom P said...

I'll have a look at some of those people you mention when I have a bit of time.

I have heard the point about the RMT before and it's a fair one. However that might be explained in part because the RMT is strong in a couple of places where withdrawal of labour can still do quite a bit of damage - the tube, the railways. Compare that with, for example the CWU in the Royal Mail. The RMT is still a very small union compared to the likes of Unite, Unison and GMB and I'm not sure their experience necessarily applies elsewhere.

I simply don't agree that Labour hasn't delivered for the unions. In the bit of the world that I know something about in policy terms (pensions & investment) Labour has a good track record. Look at what the unions were calling for in terms of pension reform 5 years or so back and look at what the Govt is going to do. There is quite a bit of common ground to say the least.

In contrast the non-Labour left was in no position to deliver anything, and their contribution to the policy debate has never realy got beyond 'strike to defend what we already have'. I genuinely think that moves to get the unions seek to affiliate to the non-Labour left will merely reinforce the public's perception that they are run by ideologues from another age.

Charlie Marks said...

Well, Labour hasn't undone the anti-union laws, and has resisted attempts by John McDonnell to introduce a private members bill to parliament.

If nothing else, the non-Labour left has helped to articulate opposition to neoliberal "reforms" that the Labour Party in government has implemented and would like to further implement.

If members of the public have the perception that the unions are run by ideologues from another age that's because the capitalist press convey this message of union dinosaurs.

Sticking solely with Labour and being uncritical in how financial support is allocated - the status quo - isn't popular with the rank and file in most affiliated unions, because the party, when it does take sides, is with the employer against the workers.

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