TheMarketForIdeas

In Friedrich Hayek’s words, “the curious task of economics is to demonstrate to men how little they really know about what they imagine they can design”. The shortsighted tendency to reduce higher-order interdependencies to linear relationships that miss out on essential details is conveyed by Robert Lucas’ “critique”. Phillips, the creator of the namesake “curve”, proved that until the ’50s, high levels of inflation were linked to a low unemployment rate. The statistical methods used then depicted the connection as strong and stable. In the early ’70s, adherents of the Keynesian school of thought, pervading both academic circles and the overall establishment, believed that pursuing inflationary policy would raise employment and generate just enough growth to escape the economic deadlock of those times. Acting on these predictions, the Federal Reserve issued currency to unprecedented levels, while the government patched up the upsurging deficit through debt.

The results fell dramatically short of the optimistic programme. The “historical” Phillips curve was shattered, as unemployment sprang aggressively in tandem with inflation. When unpacking what went wrong, the Lucas critique hits the nail on the head. The economists sought the statistical connection between inflation and unemployment in isolation, raising it to the state of “a mechanical law”, completely dismissing interactions between inflation and the other economic dimensions, such as consumer expectations. The correlation did not hold out in a vacuum, but in a historical context already outdated in the early ’70s. The markets foresaw the increase in inflation, hence prices and wages adjusted without a real impact. As John Cochrane points out, precisely the deliberate exploitation of this historical pattern, a momentary relationship lacking theoretical backing, made the curve vanish. Markets have learnt from the past and saw through the intentions of central planners. Beginning with Lucas, the compulsive modelling and tinkering with static relations came to a halt and was replaced with more structural, holistic approaches to consumer behaviour, which simultaneously account for goods, capital, labour and monetary markets.

Modelling an economy “in motion” is a highly ambitious project, verging on the impossible. In order to create a model at least somewhat representative – and not an outright caricature – of the real world, economists seek to capture the most important relations from a colossal pool of aspects that define human interaction. Notoriously, economics does not offer an avenue for trials or laboratory experiments. It instead provides a series of historical moments, where connections between variables, holding true in appearance, frequently put us on the wrong track in the past. Still, the most serious problem remains the difficulty to aptly grasp and atomise the human mind and behaviour.

A brilliant maxim by Emerson Pugh says that: “If the human brain were so simple that we could understand it, we would be so simple that we couldn’t”. Our grasp of cognitive processes has not stretched past the early, superficial stages. The glaring contrast between real behaviour and the actions implied by rational agents in models is a reason for discontent among economists. This might be the reason why, in the last few decades, some economic thinkers have distanced from creating models which try to describe human behaviour and instead attempted to change human behaviour to align with so-called “rational agents”. Instead of using a ruler to measure the length of a desk, they are using the desk to measure the ruler, to reference a metaphor by Nassim Taleb. These authors view the discrepancies between human and “rational” behaviour as rough edges, aberrations that need to be smoothed out. They make the case that, without realising, individuals make decisions incompatible with their own good and must be “guided” to act according to their individual interest.

In 2017, Richard Thaler (yet not with his “accomplice”, Cass Sunstein) was awarded the Nobel Memorial Prize in economics for Nudge Theory. The authors recommend that whenever they seek to achieve a political objective, central authorities should abandon the visibly coercive methods that stir up public outrage. In their stead, the economists propose that planners should introduce nudges, small interventions not consciously perceived by the population, which aim to induce the result wanted by the planners by subliminally changing the behaviour of individuals. The two claim that implementing nudges “alters people’s behaviour in a predictable way without forbidding any options”.

Options are not forbidden, but the way in which options are chosen altogether is altered, sometimes through processes of Pavlovian conditioning, to which the population exposes itself involuntarily and unwittingly. Some generic examples of nudges are barriers placed in metro stations designed to steer traffic, energy bills that contain sad faces whenever one’s usage level exceeds that of his neighbours, the publishing of “lists of shame” naming those who did not pay their taxes on time in order to be ostracised by the peers in their community and fiscal privileges to those owning electric vehicles. In some countries, energy consumers are automatically enrolled in schemes to use renewable energy that is more expensive, without being asked what their choice is – something called a default option nudge.

Nudge Theory finds its raison d'être in the work of psychologists Daniel Kahneman and Amos Tversky, who have shown that when making economic decisions, the human mind is sometimes susceptible to fall prey to detrimental biases. The authors demonstrated that the way in which an economic problem is framed significantly influences the decisions taken by people. Kahneman and Tversky found that many people overestimate the length of recessions and of periods of economic growth, as people expect the future to closely resemble actual conditions. It is natural that our instincts, perfect for quick reactions under duress, may sometimes be less helpful during ordinary daily interactions. Still, seeking to “correct” people’s instinctive behaviour by claiming it is in their advantage, but without bothering to get their consent and by using arbitrary and imperceptible methods undoubtedly raises some questions.

If a reform is popular, then it can be enacted aboveboard, transparently, which means that any nudging attempt exclusively concerns policies disapproved by society. Keeping this in mind, how do we make sure that politicians’ ambitions are well-intended, that their interests are not in conflict with those of the general population and that politicians can indeed be held accountable in case any harm is done? What guarantee is there that methods employed will influence individuals’ thinking “in a predictable manner” and will not have any undesirable secondary effects on the individuals’ psyche? After all, the process relies on the forced planting of an idea, not on a call to reason. There is no explanation as to why the biases Kahneman and Tversky talk about could not be overcome through educating the population and by genuinely convincing people of the benefits of reducing these prejudices through deeper thinking and self-discipline. Any person can understand the simply phrased conclusions of the two psychologists and, stemming from those, train their mind to avoid the traps through a rational and deliberate effort, without any need of exterior intervention.

What would be the long-term effect of “normalising” the human psyche following the templates of limited economic models? In the sci-fi universe of the Westworld series, a succession of global catastrophes hits the peak when a thermonuclear bomb is accidentally detonated in Paris. One of the survivors caught in the fallout, an exceedingly intelligent boy, tells to himself that humanity should never go through something like this ever again. After growing up, the prodigy constructs the blueprint for a giant oracle computer, Rehoboam. Shortly after it is built and plugged in, Rehoboam successfully predicts the future of millions of people – the entire Earth’s population – down to the smallest details of their lives. The robot correctly predicted every event that took place or was to take place for decades in a row. No one ever saw Rehoboam make a mistake, so people believe it is impossible for it to make erroneous judgements.

At first sight, the scenario might seem utopian or surreal, but one important detail makes the action, set in the year 2060, highly plausible. For each individual, Rehoboam projects a predestined “path” in life. What school he will go to, what friends he will make, what job he will have and whom will he marry. Where and when two buddies will argue and where and when they will reconcile. When someone wanders down the street and sees something which sparks an idea in his mind, he can be certain that that idea did not occur spontaneously, but was rather planted by Rehoboam. Rehoboam calculates the future with mind-boggling precision not only due to its incredible prediction power, but also because the computer is the one in charge of writing the future.

Rehoboam was built to put an end to catastrophes, hence its role is to fabricate a thread of events lacking any trace of uncertainty. People in the world believe they cannot oppose the course of things designed by the computer. This is not only because the broad lines of their lives are already established by the time they are born, but also because, in the case of any divergence from the path, the robot makes sure that a correction is performed immediately. Recalibration is done by minimally altering the events of others to bring any individual who is “off-limits” back on track to his predefinite future. In the system created by the computer, the winners and losers are picked from the get-go. No individual can surpass his place in society established by the algorithm – no one can freely move up or down the social ladder. The ways in which Rehoboam keeps the population under control almost never involve coercive methods – only reserved for extreme cases – but instead, the computer relies on a complex system of nudges.

The people are guided, through a series of subconscious stimuli, to arrive exactly at the place and time where the system needs them to be. In appearance, Rehoboam offers a series of decisions – illusory options, designed by knowing in advance what choices individuals will make, which will invariably bring people to the pre-established state of things. Releasing people from their shackles and allowing them to have real opinions and make real decisions is a menace to Rehoboam, as the choices of individuals are too impulsive and dangerous to maintain the order. This is why freedom, personality and temperament are suppressed entirely. Individuals become atoms captive to a deterministic device, controlled up to its finest aspects. Still, the supreme purpose is attained – eliminating extreme events and preventing the destruction of the human species. However, we may doubt that individuals living in such a system can be called humans any longer. This is the danger of transforming real beings into “rational agents” by designing an environment incompatible with personal freedom.

Ariel Rubinstein, one of the most successful economic theorists, spent much of his life developing models which prescribe “rational behaviour”. In the book “Economic Fables”, he draws attention to the perils of imposing a “rationalistic” worldview: “I can only say that I take pleasure in watching the rational man defeated. I do not like his perfection. The more I imagine him as flesh and blood, the more I realize that he is unbearable, even inhuman. (...) [E]ven after discerning the inconsistency in my behaviour, I will continue to break all the rules and promise to violate the economic principles of rationality. (...) I have a feeling that economics preaches that there is something that should be called correct behaviour. That makes me feel as if I am denied the right to be myself and am forced into a mold designed to train me to behave as the economic models assume I behave. I refuse to obey. (...) [T]he assumption of rationality is supposed to make me predictable. I do not want someone to anticipate my moves and I do not want to be able to predict the activity of other people. I never understood why the world would be better if there were someone who knows what we will do before we do it. I am prepared to make significant sacrifices if only to do the opposite of what the perfect prophet predicts when he appears one day”.

Constricting free human action to normalised behaviour ultimately results in greater predictability. Rehoboam does not even have to be a genius oracle to foresee the sham, manufactured future in Westworld, robbed of true potential. Slavoj Žižek similarly draws attention to the treacherous aspects of nudging, in his remarkable metaphor of the “authoritarian father”: “Imagine you are a small, eight-year old girl or boy, it’s Sunday afternoon and your father wants you to visit your old grandmother. You of course detest it. If you have an ‘old authoritarian father’, he will tell you something like: ‘Listen, I don’t care how you feel, just do your duty. Go to your grandmother and behave there properly.’ That’s perfect, I claim, because you will retain your, let’s call it, inner freedom. You will be furious at your father, but that’s good for your long-term freedom. Now, what would a monster called the ‘post-modern permissive father’ do? He would not give you an order, but he would tell you something like this: ‘You only go to visit your grandmother if you really want it. Just remember how much your grandmother loves you.’ Now, a child is not an idiot and he or she will know perfectly what this order means. Beneath the appearance of a free choice, it gives you a much harsher order. The order is not only you must go and visit your grandmother, but you must do it freely. You must really wish to visit your grandmother. The apparent freedom of choice masks a much harsher choice”.

The dimensions of human thought encompass and exceed those of standard economics behaviour models. The human mind contains facets that relate to survival mechanisms, identity, perception and purpose, while the rational agent framework does not capture these subtleties. The eradication of uncertainty can only be completed at the cost of eliminating these natural complexities. As we have observed, some economists propose that the ideal way to unravel the Gordian Knot is to pierce it with a sword – an invisible weapon which escapes the senses. It begins with the promise of being set free from your own wrong judgement, with no choice being prohibited, but it ends with drifting, little by little, towards a world where the sheer idea of choice is aberrant, as individuals become entirely controlled by their environment, just like pinballs. The number of choices allowed and forbidden becomes irrelevant, as choices exist merely on paper – in this world there does not exist, in fact, any option anymore.

Photo source: PxHere.com.