Sunday 20 April 2008

Economic policy for humans

Those who believe in public choice who tell us that regulation doesn't do what its writes think it will do. Behavioural economists on the other hand tell us that humans aren't rational and thus that carefully crafted regulation can be better than laissez faire. They have a "sophisticated" critique of laissez-faire. But it seems doubtful that "carefully crafted" is ever what regulation is.

Bryan Caplan argues, at EconLog, that the latest piece by behaviourists Thaler and Sunstein, which deals with the mortgage market and the problems borrowers can have dealing with it, provides a perfect illustration of what's wrong with "sophisticated" critiques of laissez-faire. Caplan argues
The problem with behavioral economics is that it's more sophisticated than standard econ, but not nearly sophisticated enough. Thaler and Sunstein may have a more realistic view of borrowers than the average economist, but they have an even less realistic view of the political process.
He makes the point in his book The Myth of the Rational Voter that
Before we emphasize the benefits of government intervention, let us distinguish intervention designed by a well-intentioned economist from intervention that appeals to noneconomists, and reflect that the latter predominate. You do not have to be dogmatic to take a staunchly promarket position. You just have to notice that the "sophisticated" emphasis on the benefits of intervention mistakes theoretical possibility for empirical likelihood.
The theory is thus rather better than the reality. Behaviourists should take note. The Caplan blog posting is Economic Policy for Humans? What Thaler and Sunstein Miss. Worth a look.

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