Nevertheless, the emphasis on the limits of the standard rational paradigm, as pioneered by Thaler, has been a very refreshing and useful thing. And yet behavioral economics remains wedded to this narrow conception of rationality as a normative and prescriptive standard of evaluation. It drives the critique of many market outcomes and is the basis of policy prescriptions. It is precisely because people are not narrowly rational that their behavior must be fixed. Their behavior must be taxed, regulated or nudged in the direction of the behavior of the perfectly rational neoclassical man. For example, it is alleged that people are obese because they fail to take “full account” of the negative effects of their unhealthful eating habits. What is full account? They must reckon or discount these effects at the rational rate of discount – the long-run rate, the rate one would use if one were super-rational and calm in making a diet plan to be implemented in, say, six months or a year. But how the agent looks at things now, at the moment of deciding what to eat, is wrong. It is impetuous. It is “present biased.” The individual needs help. And, in practice, it is the government’s help.
Aside from the policy implications, there is an incredible irony here. Standard economics is mocked for its rationality assumptions and yet those assumptions are held up as an ideal for real human beings.
And here’s David Henderson, in the Wall Street Journal, on Thaler’s work. Here’s David’s conclusion:
Mr. Thaler has yet to apply in a serious way his theory of irrationality to government officials. Their bad decisions are even worse because citizens bear most of the costs. It would be great if Mr. Thaler explored this area more. Someone should nudge him.
Alberto Mingardi reviews the new collection Rethinking Capitalism. He’s not impressed.
Who today is America’s most accomplishing politician? George Will’s answer might surprise you.