ANTARA HALDAR
Antara Haldar: If one views macroeconomic policy through a behavioral lens, it becomes clear that controlling inflation while causing avoidable human suffering is counterproductive. For example, the United Kingdom’s adoption of austerity policies under Prime Minister Margaret Thatcher and after the 2008 global economic crisis led to the catastrophic – and entirely unnecessary – economic disaster that was Brexit.
Conventional economic theory assumes that people in acute economic pain are somehow comforted by the prospect of tax cuts at some point in the future. In the real world, which the behavioral perspective illuminates, they feel anxiety and panic in the present. This stifles productivity and hampers economic recovery, while stoking popular anger against the political and economic establishment – precisely the sentiment that Brexit campaigners redirected against the European Union.
The behavioral approach lends credibility to Keynesian countercyclical policy, and shows that it might be preferable to use mechanisms like strategic price caps, rather than inflict yet more financial distress on people. There is a growing openness to solutions of this kind, in both the United States and Europe. But, during the latest bout of inflation, policymakers did not make nearly enough use of them.
More generally, the behavioral perspective relies on aligning institutional design with institutional motivation, so that people work with, rather than against, institutions.
AH: Development has, so far, been an entirely imitative enterprise – an elaborate game of catch-up in which the Global South mimics, largely uncritically, the Global North. But the development model everyone is applying is now under siege across the world, partly because developed economies – beset by inequality and unhappiness – are increasingly looking like a flawed archetype. If the world’s two largest economies, the US and China, are facing turmoil, why should others scramble to emulate them?
The absence of an obvious role model presents a challenge, but it also creates an opportunity to rethink the entire development game, so that the 99% – both within countries and globally – can also have a shot at winning.
This will require us to abandon the race-to-the-bottom dynamics that have historically defined development, and instead to improve outcomes for workers everywhere, such as by ensuring higher wages and better workplace conditions. (This can be achieved by making corporations forfeit a small portion of their profits.) It will also require a better balance of economic activity globally (more manufacturing in the Global North, and more innovation in the Global South) and designing an economic-policy paradigm that plays to the developing world’s strengths (for example, more collectivist tendencies). In fact, economic thought is the area where the Global South most urgently needs to contribute to innovation.
AH: Institutions defined by power imbalances are inherently unstable, especially in the long term. Yet the structures that underpin our system of global governance fit precisely that description. We know that the Global North has far more influence over the Bretton Woods institutions (the International Monetary Fund and the World Bank) and in the United Nations. But there is also an enormous imbalance between those seated around these tables and ordinary people, who have little, if any, voice in international institutions. This imbalance has fueled a backlash against globalization by left-wing anti-colonialists in the Global South and by right-wing populists in the Global North.
Economic logic might indicate that it is rational to shut down mines and factories. But the coal miners in Northern England or steel workers in America’s Rust Belt who are rendered “obsolete” by these actions are not mere parameters in a model. They are voters with a democratic voice, and their rage can bring about highly irrational outcomes, from Brexit to the election of Donald Trump in 2016. Preventing such eruptions of anger requires more than just material compensation; people need a new source of identity and meaning.
The economy does not exist in a vacuum; it is embedded in a society. So, when it starts to tear at the fabric of that society, its own foundations fray. But while we have a global economy, we lack an accompanying cosmopolitan morality. While we have global economic institutions, we lack global social institutions.
Moral and emotional economies are not illusory; they have real-world effects, and governance must account for them. This means building institutions that engage and cultivate the values of actors, at the state and individual levels. The climate crisis – the greatest existential threat we face – offers an important opportunity to create new and improved global governance structures based on both necessity and morality.
AH: I’ve just published a new paper titled “The Paris Agreement as a Paradigm Shift in International Law,” which makes the legal case that the agreement represents a breakthrough in global climate governance. (Another paper presenting rigorous quantitative evidence on the same topic is under review at a leading science journal.)
One of the Paris agreement’s key lessons for other legal systems is that all types of covenants – from contracts to constitutions and beyond – should be viewed as frameworks for cooperation based on consensus, rather than as mechanisms for coercing compliance. Such an approach would recognize that the more uncertainty characterizes a given domain, the less feasible it is to write a complete contract in advance. And many of the biggest challenges humanity faces – from climate change to regulation of cutting-edge technologies – fall into this category.
The good news is that the model set by the Paris climate agreement is being applied elsewhere. The agreement reached at the recent AI Safety Summit at Bletchley Park in the UK is a case in point. In a dialogue with key players in the tech industry, representatives from 28 countries agreed to work together to permit governments to test the AI models of eight leading companies before they are released commercially. Like the climate-governance regime established in Paris, the AI agreement is largely voluntary, but sets in motion a process that will tackle one of the biggest existential risks of our time. Regrettably, there was no such conversation about regulation when social media was gaining traction – a mistake that must not be repeated.
AH: The evidence on real people’s computational inferiority to homo economicus is chronicled in the large and growing list of heuristics and biases – that is, the energy-saving mental shortcuts we take – compiled by behavioral economists. Evidence for these shortcuts can be seen everywhere, from the tendency to overindulge in chocolate cake to the compounding individual irrationalities that led to the 2008 global financial crisis.
As for our moral superiority to homo economicus, this is evidenced by charitable giving, often to complete strangers, which produces what psychologists call a “warm glow.” It was also evident in the spike in pro-social and altruistic behavior during the COVID-19 pandemic.
But this broader, more scientifically grounded view of human nature does not mean that we must relinquish the view of economics as a predictive science. Recent breakthroughs bring scientific rigor to the behavioral, cognitive, and affective sciences: these moral phenomena – for example, a trait called “strong reciprocity,” or the tendency to cooperate if treated fairly and punish defectors even at personal cost – occur with systematic regularity.
Economics has lost considerable credibility as a predictive science, owing to its failure to anticipate many major events, from the global financial crisis to the rise of populism. Far from undermining the discipline’s status as a predictive science, accounting for increasingly well-established psychological phenomena could help to restore it.
AH: Opening economics up is, in many ways, a matter of returning to its roots. Economics began – at my own university, Cambridge – as a moral science, taught alongside psychology and philosophy. Today, however, it draws insights from – and talks to – far too narrow a range of disciplines.
Economists should engage more closely with a range of social sciences, especially psychology, sociology, and political science. They must become less rigid and more willing to incorporate knowledge from other disciplines. I’ve written extensively about how neoclassical economics has failed fully to embrace the lessons of behavioral economics (for example, it practically ignores bounded self-interest as a core human characteristic). But I should also underscore that behavioral economics has been highly selective in applying insights from psychology, neglecting much of moral and social psychology.
More broadly, economists must embrace the study of the affective (human emotion) in addition to the cognitive (human rationality). Methodological diversification is also important: complexity economics and network theory are currently treated as marginal, but they have the potential to transform the discipline by enabling a more systematic study of social dynamics.
Finally, close engagement with philosophy could help economics become a richer normative enterprise, while retaining rigorous foundations. Ethics needs to be able to override narrow views of economic efficiency.
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