Among the winners of the Economics Nobel  two of the most interesting are George Akerlof and Robert Shiller. Their book Animal Spirits provided me with much of the intellectual stimulus to write my own Zombie Economics. Their latest has the intriguing title Phishing for Phools: The Economics of Manipulation and Deception.
The central theme is simple. We are all prone to errors in reasoning. Given the complexity of the world, and the finiteness of our reasoning capacity, it could scarcely be otherwise. This obviously leads to decisions that differ from the perfect optimality assumed in simplistic versions of economics.
More importantly, markets create opportunities for others to exploit and amplify our errors in reasoning. Advertising uses all sorts of device to encourage us to make decisions that we would not make if we gave careful and rational consideration to our choices. The entire credit card industry relies for its profitability on the fact that cardholders don’t (as is almost always sensible) pay off their balances every month. And so on.
As Akerlof and Shiller observe, the fact that markets systematically amplify reasoning failures undermines the standard claims about the optimality of market processes.
The proposed policy responses are a bit limited, focusing mainly on regulation and consumer protection. Still, the book is well worth reading.
An interesting side point is an argument that the harms of alcohol, a notorious source of suboptimal decisions, have been greatly underestimated.
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Another Monday Message Board. Post comments on any topic. Civil discussion and no coarse language please. Side discussions and idees fixes to the sandpits, please.
A new sandpit for long side discussions, idees fixes and so on. Discussions about climate policy and related issues can be posted here, along with the usual things.
… has blown for any notion of “sane Republicans”. Comment seems superfluous, but I will repost some older pieces, going back to 2004, which I think stand up pretty well
Science versus the Republicans
Ignorance is strength
Has vaccination become a partisan issue?
Here’s another draft extract from my book-in-progress, Economics in Two Lessons, looking at income distribution. The entire draft section on this topic is available here. And the introduction, describing the general approach of the book is here.
Praise is welcome, and useful criticism even more so. As a reminder, this is an extract. If you think a crucial point has been missed, point it out, but bear in mind that it may be addressed elsewhere in the book.
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As has happened before, I was travelling when the Prime Ministership suddenly changed hands. I’m still on holiday, though I briefly appeared before the South Australian Royal Commission on the Nuclear Fuel Cycle yesterday. But even without following the news closely, it’s easy enough to see that the Turnbull LNP government is basically the Abbott government with the gratuitous culture war element removed.
On climate change, for example, we’ve seen the end of attempts to kill the highly successful Clean Energy Finance Corporation, but no major change to the absurdly misnamed “Direct Action” policy, and a doubling down on Abbott’s support for coal from newly promoted minister Josh Frydenberg.
In particular, contrary to suggestions that Turnbull is going to push for a more “market liberal” approach, Frydenberg is still touting the idea of subsidising the Adani Carmichael boondoggle. I doubt that anything will come of this (on this score, the supposed deal with Downer EDI to build Adani’s railroad seems to have quietly died), but it’s indicative of the government’s position. And the new coalition deal, handing over water policy to Barnaby Joyce, amounts to a repudiation of everything Turnbull stood for when he was Water Minister under Howard.
The abandonment of the culture wars looks like something of a double-edged sword. On the one hand, it was obviously necessary, given the extent to which Abbott’s absurdities discredited the whole enterprise. On the other hand, much of the LNP base and commentariat are so committed to culture war politics that they will have grave difficulty in supporting Turnbull even if they want to: most of their usual lines against inner city elites, latte liberals and so on are far more applicable to their own new leader than to Labor and the Greens.
My success as a pundit is notoriously mixed. Still, I find it hard to see how Turnbull can sustain his initial bounce in the polls without taking tougher decisions than those he has been willing to make so far.
I have a piece in The Economist climate blog, making the point that the risk of catastrophic climate change has been ignored by “lukewarmists” like Bjorn Lomborg and Jim Manzi.