22 March 2007:

Exploding the Myths of Neoclassical Economics: Barry Schwartz in the London Review of Books

On the face of it, neoclassical economics would seem to be anything but Carlyle's "dismal science." The sky's the limit on free trade growth! Money is free to find the best returns, anywhere! And choices, if not infinite, are certainly abundant. Everyone is free to customize his or her own life down to the last detail.

Given the money, that is. Neoclassical economists aren't interested in how much money anybody has. They're only interested in how much money is out there, and more money is always better.

Now, according to Barry Schwartz, writing in the London Review of Books, Oxford professor Avner Offer has mounted a "frontal assault" on neoclassical economics that makes abundant use, for a change, of the tools that economists use. The siege weapon is The Challenge of Affluence: Self-Control and Well-Being in the United States and Britain Since 1950 (Oxford, 2006). Mr Schwartz summarizes:

Offer makes the powerful argument, with data derived mostly from research in the UK and the US, that not only has our unprecedented affluence failed to make us better off, it may actually have made us worse off; not only does affluence fail to solve the most basic human problems, it creates new ones. We measure the wrong things, we adopt policies designed to promote the wrong things, and we spend money on the wrong things. We have wasted too much time listening to economists. There is an extensive literature on the determinants of wellbeing that for more than forty years has studied people across the globe. The results indicate that wealth is extremely important as people struggle from poverty to subsistence. After that, the welfare gains diminish, and other aspects of life become more important. This amounts to an argument that people living in poor countries should be taking their cues from economists, but people living in rich countries should not.

Mr Schwartz offers an anecdote that may or may not come from The Challenge of Affluence. Two social scientists, Bruno Frey and Felix Oberholzer-Gee, polled Swiss citizens about nuclear waste dumps. Each person was asked one of two questions. The simple question asked whether one would be comfortable with a dump in one's town. The complex question asked the simple question and threw in the offer of six weeks' pay. Economists would say that the second question introduced a powerful incentive. In fact, the poll yielded utterly contrary results. Half of those who were asked the simple question said that they would be okay with a dump in their town, but only twenty-five percent of those who were also offered money were prepared to assent. Many Swiss were prepared to shoulder their responsibilities as citizens for free, but far fewer were willing to do so for cash. "Put another way, the offer of money undermined the moral force of the situation." This accords with what we know about human nature. But economists are interested only in that fabulous beast, homo economicus, a creature incapable of making "irrational" choices. As Professor Offer says, "the rational consumer is a fiction." 

Mr Schwartz reminds us that Adam Smith, in his Theory of Moral Sentiments (1759), posited a "natural sympathy" for one's fellows that would moderate competitive ambition - and was rather naive to do so. Like most thinkers of his time, Smith was unaware that much of what he took to be "human nature" was really an intensive if impalpable socialization, conducted quietly under the auspices of social and religious traditions. These traditions have worn pretty thin in our time, and the modern mantra of "personal responsibility" is hardly conducive to the virtues of faith, hope, and charity. Neoclassical economic theory is really a branch of nihilism. Sauve qui peut!

Trying to imagine an economic environment that's not only more equitable but also simply viable, Mr Schwartz runs far with Professor Offer's ball.

And if you combine redistribution of wealth with politicies designed to enhance 'in-kind' goods and services rather than GDP, you can make real social progress. Instead of giving people more money, tempting them to run for even longer on the hedonic treadmill, you could provide better schools, better health care, greener parks and more comfortable community centres from which everyone can benefit. Reduce the working week so that people will have more time to spend as citizens, partners and parents. An important step in this direction would be a new system of national accounts - one that measures what really matters to wellbeing, instead of what's easy to measure. I'm not sure that Offer would endorse any of these proposals, but it seems to me that if he takes his own analysis seriously, he should. And so should the rest of us.

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