My latest book review was published in the Spiked Review yesterday.

From the title onwards, Utopia for Realists is an exercise in sophistry. Despite the ample use of revolutionary rhetoric, the consequence of its proposals would be a hyper-austerity that would make the most hawkish free marketeer blush.

Let’s start with the book’s outsized claims. Rutger Bregman, a 29-year-old Dutch writer, says the work is ‘an attempt to unlock the future’. He puts his proposals on a par with the historical campaigns for democracy, the abolition of slavery and women’s suffrage. So he certainly appears to have no shortage of ambition.

Bregman also makes the welcome argument that there is an alternative to the way the world currently runs. ‘Things could be different. The way our world is organised is not the result of some axiomatic evolution.’

More specifically, his big idea is that everyone, however rich or poor, should have a right to a universal basic income (UBI) paid by the state. ‘Free money for everyone’, as he prefers to call it. In this he claims to be following in the footsteps of a peculiar combination of luminaries, from democratic campaigners (Thomas Paine, Martin Luther King) to free-market economists (Milton Friedman, Friedrich Hayek) and disgraced politicians (US President Richard Nixon). Bregman argues that such a programme would lead to lower inequality, less poverty, lower crime rates and higher economic growth. To substantiate his case, he points to empirical studies mainly done by economists.

For example, he starts his second chapter with an account of a research programme conducted on 13 homeless men in London a few years ago. A local charity gave the men £3,000 each in cash to spend as they wished. In Bregman’s account, the experiment was a resounding success. The lives of all 13 improved considerably in the year and a half after the experiment began. Moreover, the London homeless project saved a huge amount of money in terms of the costs of policing and welfare. This opens the way for his subsequent argument that a UBI could replace conventional social-security payments. In his view, the welfare state has become ‘a perverse behemoth of control and humiliation’. This argument has some truth to it although it understates the extent to which the welfare system in many countries has come to sap individual ambition and corrode social solidarity.

Bregman also claims that Westerners will be working 15-hour weeks by 2030. The developed economies will be so wealthy that there will be no need to work longer. Although he devotes an entire chapter to this topic, he does not make the connection to the UBI explicit. Presumably it is to help with the transition to a more leisured society.

In certain circles, Bregman has won widespread plaudits for his arguments. The Guardian has described him as a ‘Dutch Wunderkind’, and numerous intellectual luminaries have endorsed his book. Support for the idea of a UBI is also gaining ground in many countries. In that respect, Britain is relatively late to the game. Switzerland had a referendum in 2016 on a proposal to introduce the basic income, although it was rejected by 77 per cent of those voting with only 23 per cent backing it. There are also UBI experiments taking place in Canada, Finland, India, Kenya and the Netherlands. It has gained significant support in Silicon Valley, including from the likes of Elon Musk, a tech billionaire, and Sam Altman, who is the head of Y Combinator, a start-up incubator, and the backer of a UBI pilot programme.

At first sight, there might not appear to be much in Bregman’s proposals to object to apart from his own hype. Of course, most people would find the idea of governments giving cash handouts to billionaires outlandish. Other than that, it seems like at least a plausible proposal. But read Bregman’s book closely and it becomes apparent that what is really being suggested is a savage cut in living standards. He tries to play down these consequences, but the argument is clearly there for those who care to look. In this he shares much with the eco-modernists who use progressive language but are even more reactionary than mainstream greens.

Read Utopia for Realists closely, and it becomes clear that it favours the idea of a UBI precisely because it will encourage people to work less. Reducing the incentive to work is not an inadvertent flaw in the proposal, but its essence. ‘Some people may opt to work less, but that’s precisely the point’, he says. Bregman wants people to do less work precisely because their income will fall and in turn they will be less able to buy things. ‘Consuming less starts with working less’, he says.

Many of the favourite green dogmas are stated explicitly in Utopia for Realists. He says we live in a world of ‘overabundance’ and in the midst of an ‘addiction to consumerism’, where the working classes are duped by the elite into ‘false consciousness’. Bregman concedes that consumption could rise a little in the short term, but argues that the inevitably adverse effects would include pollution and obesity.

Of course, more leisure time – of the voluntary variety rather than the enforced – would be desirable if it could be achieved while maintaining high living standards. But a precondition for meeting this goal would be a more productive economy than exists at present. An economy that was a more dynamic could maintain high living standards, while allowing us to work 15 hours per week. This challenge of raising productivity is central to the discussion in Creative Destruction, by spiked contributor Phil Mullan.

But nowhere does Utopia for Realists address the West’s prolonged economic lethargy. Instead Bregman loves discussing small-scale academic studies, such as that on 13 homeless men in London, but nowhere does he discuss the West’s economic stagnation. On the contrary, the working assumption, made explicitly but played down, is that popular consumption must be slashed rather than increased.

Utopia for Realists professes opposition to austerity, but he has put forward a programme that would in practice outdo the most hardcore fiscal conservatives. He is yet another green miserabilist discussed as an optimist.

Daniel Ben-Ami is a writer based in London. Visit his website here. An expanded version of Ferraris for All: In Defence of Economic Progress is available in paperback.

Utopia for Realists: And How We Can Get There, by Rutger Bregman, is published by Bloomsbury.

This is the full text of my book review that was in the Financial Times last Friday.

At first sight it is hard to see how anyone could object. Many of the world’s richest people are devoting vast sums towards helping to solve some of the world’s most pressing problems. In some cases, the causes are politically contentious topics, but often they relate to areas of seemingly universal concern such as education and medical research.

One might think the contemporary obsession with economic inequality would only add to the appeal of the new philanthropy. After all, the world’s richest people are giving away their fortunes to benefit those who, by definition, are far worse off financially.

However, the critics are vociferous. They charge the new generation of philanthropists with using their wealth to exert an outsized influence on key areas of public interest. In effect, the wealthy are accused of undermining democracy. In addition, they are charged with setting up foundations and other organisations as a way of sometimes circumventing income taxes and estate taxes.

The Givers, by David Callahan, the founder and editor of the Inside Philanthropy website, is a balanced account of the rise of the new philanthropy in the US. Although the tradition of giving is long established, its exponents are more numerous and more influential than ever. He shows who the new philanthropists are, what causes they favour and what motivates them. He also considers the charge that the rising power of philanthropy is pushing ordinary Americans even farther into the margins of civic life.

Perhaps Callahan’s most striking finding is that, by many dimensions, the new philanthropists are a diverse lot. They come in a wide variety of ages, levels of educational attainment and preoccupations. Admittedly almost all of them are white males, but an increasing number are women.

Many do not fit the traditional mould of fiscal conservatism and support for the free market. On the contrary, more and more of them support what are often regarded as liberal causes. It is true, for example, that the brothers Charles and David Koch are well known for supporting conservative and libertarian groups. Less appreciated is that support for lesbian, gay, bisexual and trans rights has some wealthy backers. Take the Williams Institute, a centre for research into LGBT law and policy at the University of California, Los Angeles, which was established with a $2.5m gift from Chuck Williams, a wealthy donor.

Many other philanthropists see their giving as funding practical help, rather than making any sort of political statement. Their giving is determined by expert assessments of what might achieve the best results. The Bill & Melinda Gates Foundation is perhaps the archetypal example of this trend, with its focus on education, world health and community giving.

Diverse though they may be, the various forms of philanthropy and donor preferences have one thing in common: they all involve the wealthy to some degree exerting an influence on society’s priorities — for example, on which diseases to tackle or which forms of education they see as preferable.

The new philanthropy is on the rise at the same time as the US government appears less able to solve big problems or even efficiently manage routine services. For example, the number of charter schools — which have greater autonomy from state control than traditional publicly funded schools — is growing. Meanwhile, even public (state) universities in the US are increasingly dependent on philanthropic funding.

The net effect is that many ordinary Americans feel marginalised from civic life. Key decisions on how their communities are run seem to have been ceded to the rich in this new gilded age.

There is a risk of exaggerating the role of philanthropy in creating this sense of marginalisation. Indeed, Callahan is right to emphasise that even the billions donated by philanthropists are dwarfed by the scale of the problems they are attempting to address. The level of government spending also greatly exceeds philanthropic giving in many areas.

Callahan’s solution, at least in relation to the philanthropic sector itself, includes stronger watchdogs and greater transparency. But while such proposals may have merits, they fail to get to the core of the problem — that democracy seems to have lost its vitality in the US and indeed in Europe. The broader challenge is one of a democratic renewal that involves the people as a whole, the demos, in the political process.

The Givers: Money, Power and Philanthropy in a New Gilded Age, by David Callahan, Knopf

The Givers

7 May 2017

On Friday the Financial Times published my review of David Callahan’s The Givers: Wealth, Power, and Philanthropy in a New Gilded Age. I will upload the text in the next few days but in the meantime it is available to read here (you may need to register to gain access).

The ÖkonomenBlog, a project of the Initiative Neue Soziale Marktwirtschaft (INSM – Initiative for a New Social Market Economy) has reproduced my recent article on behavioural economics. It was first published in English on spiked then translated into German by Novo magazine.

Latest FT book review

11 Mar 2017

Yesterday the Financial Times published my review of JC Sharman’s The Despot’s Guide to Wealth Management.

Ever thought who the fellow customers of your bank might be? No doubt the vast majority are decent, hard-working people but could they include foreign leaders who have embezzled many millions from their impoverished countries?

Nowadays it is unlikely that a respectable bank would cultivate such a situation knowingly. But it can and almost certainly does happen through the lax implementation of regulations or the successful disguise of the sources of stolen assets.

A similar situation exists in relation to lawyers and property professionals. No doubt a small minority is involved in facilitating this vast siphoning of assets and some know exactly what they are doing.

JC Sharman, a professor of international relations at Cambridge university, is interested in the role of western governments and financial institutions in facilitating grand corruption. The “grand” here refers to political leaders and senior public officials. The Despot’s Guide to Wealth Management: On the International Campaign Against Grand Corruption is not about small-scale theft but about the proceeds of kleptocracy: government by corrupt rulers.

The book’s strength derives from its avoidance of the common error of reading history backwards; looking for the particular characteristics of the present in the past. He shows that, contrary to what many might assume, international corruption was not always a pressing concern. On the contrary, it was only in the 1990s that western leaders started discussing it in earnest.

In the previous period, up until the end of the 1980s, the main western foreign policy imperative was to counter the influence of communism. The west was willing to tolerate kleptocrats if the leaders involved were allies against Soviet influence. These included Ferdinand Marcos, president of the Philippines, and Mobutu Sese Seko, president of the Democratic Republic of Congo.

Of course western countries sometimes still turn a blind eye to dictatorial allies. However, the consensus is that such inaction is wrong even though some might regard it as necessary in some cases.

Since the 1990s, a plethora of institutions has emerged to help tackle grand corruption. These include international organisations such as the OECD and the World Bank as well as non-governmental organisations such as Transparency International and Global Witness. They have support from western governments and sometimes receive funding from philanthropic bodies such as George Soros’ Open Society Foundations.

Sharman is an ardent supporter of the turn against international corruption but is sharply critical of its implementation. He argues that, as far as it is possible to estimate, only a tiny proportion of such assets are recovered and the costs involved are enormous. There are several reasons for this lack of effectiveness, including realpolitik, the commercial incentives operating on banks and the inherent difficulty of international legal action.

Instead he favours an emphasis on alternative anti-kleptocratic measures to bolster prevention and deterrence. These include giving non-governmental organisations a greater role in tackling corruption and targeted financial sanctions.

Yet Sharman’s approach underestimates some fundamental challenges. For a start the west’s drive against grand corruption is, in a sense, not about enforcement. It emerged as part of an attempt to find a mission, or what Sharman calls moral leadership, with the end of the Cold War. Western politicians can all too easily make themselves feel good while winning points back home by using international conferences to denounce foreign kleptocrats.

Sharman also pays scant attention to the consequences of undermining the sovereignty of poor countries still further. It would appear that he suggests having a list of criteria which if met would designate particular countries as being systemically corrupt. The sentiment is no doubt well-intentioned and understandable but it should be recognised that it means subjecting national governments to external sanction.

As a result, poor countries would have even less control over their affairs than they do at present.

The Despot’s Guide to Wealth Management: On the International Campaign Against Grand Corruption, by JC Sharman, Cornell University Press

German translation

19 Feb 2017

Novo magazine has published a German translation of my spiked article defending rational man.

Die Verhaltensökonomie bietet eine pseudowissenschaftliche Legitimation für antidemokratische Einstellungen.

Unsere persönliche Sicht auf politische Zusammenhänge hängt zu großen Teilen davon ab, ob wir glauben, dass Menschen dazu fähig sind, vernünftige Entscheidungen zu treffen. Es ist keine Übertreibung zu behaupten, dass die Ideen von Freiheit und Demokratie auf der Annahme basieren, dass Menschen rational handeln können.

Denken Sie an eine beliebige politische Entscheidung: Sollte Großbritannien zur Europäischen Union gehören? Wer sollte Präsident der Vereinigten Staaten von Amerika werden? Welche Wirtschaftspolitik würde der Bevölkerung am meisten zugute kommen? Diese politischen Fragen zur öffentlichen Debatte freizugeben und zur Wahl zu stellen, setzt die Annahme menschlicher Rationalität voraus.

Natürlich halten sich Anti-Demokraten selbst in der heutigen Zeit normalerweise damit zurück, demokratische Prinzipien oder die menschliche Rationalität direkt anzugreifen. Stattdessen bedienen sie sich häufig der impliziten Annahme, dass nur die technokratische Elite tatsächlich dazu befähigt sei, rationale Entscheidungen zu treffen. Der Rest von uns wird als unfähig erachtet, vernünftig zu handeln. Sie halten uns für dumm, aber hüten sich selbstverständlich davor, dies öffentlich so zu äußern.

Stattdessen wird gerne die ‚Verhaltensökonomie‘ als Argument herangezogen. Im Gegensatz zu ihrer Bezeichnung hat diese wenig mit Ökonomie zu tun – zumindest mit deren traditionellem Verständnis als Studium der Verhältnisse von Produktion und Verbrauch. Sie sollte eher als eine vermeintlich wissenschaftliche Abwertung der rationalen Fähigkeiten des Menschen verstanden werden.

Der Grund dafür, dass ‚Ökonomie‘ in den Namen mit einbezogen wurde, liegt, dass diese Disziplin üblicherweise Rationalität geradezu verkörpert. Die Mainstream-Ökonomie wird von ihren Kritikern schließlich gerne als Verkörperung eines blinden Glaubens an die menschliche Rationalität dargestellt. Die Verhaltensökonomie geht jedoch weit über Ansätze zum Verständnis der materiellen Welt hinaus. Sie basiert auf der Annahme, dass psychologische Studien zeigen, dass Menschen tiefgreifende kognitive Einschränkungen haben. Schlussfolgernd wird davon ausgegangen, dass Menschen anfällig dafür sind, schwerwiegende Fehler zu machen.

Das Buch „Aus der Welt“ von Michael Lewis gibt eine nützliche Übersicht darüber, wie sich diese Ideen entwickelt haben. Lewis‘ große Fähigkeit liegt darin, komplexe Sachverhalte auf zugängliche Art und Weise zu präsentieren. Viele seiner Bücher, die sich oft mit relativ abstrusen Finanzthemen auseinandersetzen, wurden zu Bestsellern. Einige davon, wie „Moneyball“ und „The Big Short“, haben sogar die Grundlage für Hollywood-Blockbuster geliefert.

Die unwahrscheinlichen Vorläufer dessen, was heute als Verhaltensökonomie bekannt ist, waren zwei Israelische Psychologen, die ihre Arbeit in den 1950er Jahren begonnen haben. Daniel Kahneman, dem 2002 der Wirtschafts-Nobelpreis verliehen wurde, verbrachte einen Großteil seiner Kindheit in Frankreich. Er ist dem Holocaust wahrscheinlich nur entronnen, weil sein Vater Chemiker bei der großen französischen Kosmetikfirma L’Oréal war. Die Arbeit des Vaters wurde als hilfreich für die Kriegsführung erachtet und sein Leben deshalb verschont.

Amos Tversky, Kahnemans wissenschaftlicher Partner, wurde im damaligen britischen Mandatsgebiet Palästina geboren, wo später der Staat Israel entstand. Er war weitaus extrovertierter als Kahneman, aber beide einte ein gemeinsames Interesse an der Humanpsychologie. Tversky verstarb 1996, sodass ihm, obwohl er in professionellen Kreisen bis dahin durchaus bekannt war, nie eine so breite öffentliche Aufmerksamkeit zuteil wurde wie Kahneman in letzter Zeit.

Obwohl Michael Lewis nicht näher darauf eingeht, versteht er es gut, die spezifischen Umstände zu umreißen, unter denen Kahneman und Tversky ihre Ideen entwickelten. Beide arbeiteten kurz nach dem Holocaust in einer Nation, die sich in einem permanenten Kriegszustand befand. Unter diesen Umständen ist es nicht weiter verwunderlich, dass sie ein starkes Interesse dafür entwickelten, wie Menschen denken und auch, dass ihre Schlussfolgerungen häufig negativer Art waren.

Einen Großteil von Kahnemans und Tverskys Arbeitsweise bildeten intensive Debatten über psychologische Phänomene, die hinter verschlossenen Türen stattfanden. Lewis‘ Ausführungen nach zu urteilen, standen sich die beiden mindestens so nah wie ein Ehepaar. Ein weiterer wichtiger Teil ihrer Methodik bestand darin, Probanden anhand verschiedener Rätsel zu testen. Ihre wichtigste Schlussfolgerung war, dass Menschen systematische kognitive Verzerrungen aufweisen. Sie machen nicht nur Fehler, ihre Irrtümer sind sogar vorhersehbar und lenken Menschen oft in eine bestimmte Richtung.

Kahnemans und Tverskys erste große Idee wurde unter dem Begriff „Verfügbarkeitsheuristik“ bekannt. Es handelt sich dabei um die Tendenz von Menschen, Urteile auf Basis von Informationen zu fällen, die ihnen unmittelbar in den Sinn kommen. In einer amerikanischen Studie etwa wurde eine Gruppe von Studenten nach der Häufigkeit von Buchstaben in der englischen Sprache befragt (Wörter mit weniger als drei Buchstaben wurden ausgeschlossen). Die Studenten gaben an, dass die Wahrscheinlichkeit, dass der Buchstabe ‚k‘ der erste Buchstabe eines Wortes ist, doppelt so hoch sei, wie die, dass er der dritte ist. In Wirklichkeit ist jedoch das Gegenteil der Fall. Der Buchstabe ‚k‘ taucht in englischen Wörtern zweimal so oft als dritter Buchstabe denn als erster Buchstabe auf.

Kahneman und Tversky schlossen daraus, dass das Gedächtnis von Menschen insofern verzerrt ist, dass es einfacher ist, sich Wörter zu merken, die mit ‚k‘ beginnen, als jene die das ‚k‘ als dritten Buchstaben tragen. Deshalb schlagen die mentalen Stützen, die genutzt werden, um alltägliche Entscheidungen zu treffen, in solchen Fällen fehl.

Ein weiteres Beispiel ist bekannt als Anker- beziehungsweise Anpassungsheuristik. Kahnemann und Tversky baten zwei Gruppen von Schülern, die Antworten zu Matheaufgaben innerhalb von fünf Sekunden zu schätzen. Die erste Gruppe wurde gebeten, das Ergebnis von 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 zu schätzen, die zweite Gruppe jenes von 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8. Wer kurz darüber nachdenkt, sollte merken, dass die Antworten der beiden Aufgaben identisch sind (das Ergebnis lautet übrigens 40.320). Die durchschnittliche Antwort der ersten Gruppe war jedoch 2250 und die der zweiten 512. Der Grund dafür ist, dass die erste Gruppe die acht und die zweite Gruppe die eins als mentalen Anker beziehungsweise Ausgangspunkt genutzt hat.

Auf den ersten Blick scheinen diese Beispiele rein gar nichts mit Politik zu tun zu haben. Im Endeffekt hängt dies jedoch davon ab, welche Schlussfolgerungen man aus ihnen zieht. An und für sich ist es nicht verkehrt, kognitive Vorurteile dieser Art zu untersuchen. Es ist im Gegenteil sogar ein höchst sinnvoller Forschungsbereich für Psychologen. Wenn solche Fälle jedoch (aus)genutzt werden, um dem Argument, dass Menschen irrational handeln, wissenschaftliche Glaubwürdigkeit zu verleihen, ist das eine ganz andere Angelegenheit.

Sogar Kahneman, der es im Gegensatz zu einigen seiner Kollegen vermeidet, menschliches Verhalten als irrational zu bezeichnen, ist anfällig für derartige Interpretationen. In seinem  Weltbestseller „Schnelles Denken, Langsames Denken“ nutzt er zum Beispiel das Verhalten von Taxifahrern, um seine Argumentation zu illustrieren. Kahneman führt aus, dass Taxifahrer typischerweise den Fehler begehen, sich ein tägliches Verdienstziel zu setzen. Daher würden sie zu lange arbeiten, wenn es sonnig ist (wenn also die Gewinne durchschnittlich geringer sind) und nicht lange genug fahren, wenn es regnerisch ist (wenn also die Gewinne durchschnittlich höher sind).

Man sollte jedoch stets vorsichtig sein, wenn Experten damit anfangen, pauschale Aussagen darüber zu treffen, wie gewöhnliche Menschen ihren Alltag führen. Es kann alle möglichen Gründe dafür geben, dass sich Leute auf eine bestimmte Weise verhalten. Taxifahrer zum Beispiel haben vielleicht wöchentliche Rechnungen zu bezahlen, unabhängig vom Wetter. Und eventuell haben sie keine Rücklagen, um durch magere Zeiten zu kommen. Viele Fahrer weisen außerdem die Aussage zurück, dass die Verdienste in regnerischen Zeiten besser sind (Ich habe sie nämlich bei jeder passenden Gelegenheit danach gefragt). Einigen zufolge buchen Gäste sogar kürzere Fahrten, wenn es regnet, und gehen die Leute bei schlechtem Wetter ohnehin seltener raus als bei sonnigem.

Menschliches Verhalten ist meist weitaus komplexer, als es simple Laborexperimente, wie die vorstehend beschriebenen, erfassen können. Selbsternannte Experten agieren meist voreilig, wenn sie Menschen unterstellen, dass sie ihren eigenen Interessen zuwider handeln.

Dies ist umso mehr der Fall, wenn es um komplizierte politische Entscheidungen wie den Brexit geht. Was technokratisch orientierten Politikern wichtig ist – im Falle der Europäischen Union etwa die Fähigkeit, wichtige politische Entscheidungen fernab von öffentlicher Überprüfung zu treffen – ist nicht identisch mit dem, was den meisten Bürgern wichtig ist. Wenn also EU-Fans Brexit-Befürworter als irrational bezeichnen, so ist dies im Wesentlichen eine Form der Diffamierung. Tatsächlich haben die Brexit-Wähler lediglich andere, jedoch durchaus vernünftige, Kriterien angelegt. Solche grundsätzlichen Meinungsverschiedenheiten sollten das Wesen politischer Debatten darstellen.

In jedem Fall ist natürlich die Behauptung absurd, die Prämisse der Rationalität würde besagen, dass alle Menschen perfekt kalkulierende Maschinen sind. Kein ernstzunehmender politischer Philosoph würde argumentieren, dass Menschen immun gegen Fehler sind. Der Kernpunkt ist jedoch, dass Menschen fähig sind, ihre Interessen zu verstehen und in rationaler Art und Weise zu artikulieren.

Politische Institutionen sollten so organisiert sein, dass sie rationale Entscheidungsprozesse ermöglichen. Dazu brauchen wir freie und ehrliche Debatten, die uns erlauben, Entscheidungen ernsthaft zu reflektieren. Solche Debatten würden den Bürgern außerdem bei der Abwägung helfen, welche Auswirkungen ihre Entscheidungen auf die Gesamtgesellschaft haben, anstatt diese nur aus einem engen, persönlichen Blickwinkel zu beurteilen.

Die Schwäche von „Aus der Welt“ liegt darin, dass das Buch die Verhaltensökonomie nicht in ihrem breiteren politischen Kontext sieht. Die Abschätzigkeit der Elite gegenüber den rationalen Fähigkeiten der Öffentlichkeit reicht schließlich mindestens bis zu Platons „Politeia“ zurück. Die Verhaltensökonomie hat gerade deshalb in Establishment-Kreisen so an Popularität gewonnen, weil sie eine pseudowissenschaftliche Legitimation für antidemokratische Ideen liefert.

Last Friday spiked published an article by me on behavioural economics.

An individual’s stance on politics largely depends on his view of the capacity of humans to exercise reason. It is no exaggeration to say that the ideas of freedom and democracy are premised on the notion that people can act rationally. Think of any political decision of any importance. Should Britain be in the European Union? Who should be president of the United States? What economic policies would serve the public best? The case for opening these questions up to public debate, and putting them to the vote, is premised on the notion of human rationality.

Of course, even today, anti-democrats are generally a little wary of attacking democracy or human rationality directly. Instead they typically work on the implicit assumption that only the technocratic elite is fully capable of rational decision-making. The rest of us are seen as impaired in our ability to act rationally. They think we are a bit stupid but they are often guarded about saying so in public.

This is where the field of ‘behavioural economics’ comes in. Contrary to the label, it has little to do with economics – at least in the conventional sense of the study of how production and consumption are organised. It is better seen as an ostensibly scientific assault on the rational capacity of human beings. The main reason ‘economics’ is included as part of the name is that the discipline is conventionally seen as embodying rationality. Mainstream economics is presented by the critics as exemplifying what they see as the erroneous assumption that people tend to behave rationally.

Behavioural economics goes far beyond discussions of how to understand the material world. It is premised on the idea that the psychological evidence shows that humans have severe cognitive limitations. As a result, it assumes that people are prone to making serious mistakes.

Michael Lewis’s The Undoing Project provides a useful account of how these ideas developed. His great gift is to outline difficult ideas in an accessible way. Many of his books, often on relatively obscure financial topics, have become hugely popular sellers. Some of them, such as Moneyball and The Big Short, have also provided the basis for Hollywood blockbusters.

The unlikely precursors to what has since become known as behavioural economics were two Israeli psychologists who started work in the 1950s. Daniel Kahneman, who was to win the Nobel Prize for economics in 2002, spent most of his childhood years in France. He probably only escaped death at the hands of the Nazis because his father worked as a chemist for L’Oreal, the giant French cosmetics company. Kahneman senior was allowed to live as his work was deemed useful to the war effort.

Amos Tversky, Kahneman’s professional collaborator, was born in what was then British mandate Palestine but later became the state of Israel. He was far more of an extrovert than Kahneman, but they shared a common interest in human psychology. Tversky died in 1996 so, although he was well known in professional circles by then, he did not enjoy the huge public recognition Kahneman has had in recent years.

Although Michael Lewis does not labour the point, he does a good job of describing the peculiar circumstances in which Kahneman and Tversky developed their ideas. They were working shortly after the Holocaust and in the midst of a nation that was in a permanent state of war. In such circumstances it is not surprising they developed a keen interest in how people think and that their conclusions were often negative ones.

A large part of Kahneman and Tversky’s working method was to shut their office door behind them before obsessively debating psychological phenomena. In Lewis’s telling they were as close as, if not closer than, a married couple. Another important part in their work was quizzing people on various puzzles they posed to them. The main conclusion they reached was that people have systematic cognitive biases. They don’t just make mistakes; their errors are also predictable and often point in a particular direction.

Their first big idea became known as the availability heuristic. This is essentially a mental shortcut that relies on immediate examples of what comes to mind. For example, they asked a group of students in Oregon about the frequency of letters in the English language (excluding words with fewer than three letters). Typically students said that they thought the letter ‘k’ was twice as likely to appear as the first letter of an English word as the third letter. But in reality the opposite is true. The letter ‘k’ appears twice as often as the third letter than as the first letter in English words.

Kahneman and Tversky proposed that people’s memories were skewed because it was easier to remember words with k as the first letter than as the third letter. The mental shortcuts people used to make everyday decisions were prone to error in such circumstances.

Another example is known as the anchoring and adjustment heuristic. Kahneman and Tversky took two groups of high-school students and asked them to estimate the answer to a maths question within five seconds. The first group was asked to estimate: 8x7x6x5x4x3x2x1. The second group was asked to estimate: 1x2x3x4x5x6x7x8. A moment’s reflection should indicate the answers to the two questions are identical (40,320). But the first group’s median answer was 2,250 and the second group’s median answer was 512. The first group had used eight as a mental starting point and the second group had used one.

At first sight, such examples might appear a world away from politics, but that depends on what kinds of conclusions are drawn from them. There is nothing inherently wrong with investigating cognitive biases of this type. On the contrary, it is a perfectly reasonable sphere for psychologists to investigate. But when such cases are used to give scientific credence to the idea that humans are irrational, that is a different matter.

Even Kahneman, who, unlike some of his colleagues, dislikes describing human behaviour as irrational, is prone to such extrapolation. For instance, in Thinking, Fast and Slow (2011), his international bestseller, he gives the example of the behaviour of taxi drivers to illustrate his point (He also used the example in a BBC Horizon programme). He says taxi drivers typically make the mistake of giving themselves a daily earnings target. As a result, they work for too long when it is sunny (so earnings are typically lower) and not long enough when it is rainy (when earnings are typically high).

But it is always best to be wary when experts make sweeping statements about how ordinary people run their everyday lives. There can be all sorts of reasons people act in the way they do. Taxi drivers, for example, might have weekly bills to pay whatever the weather. And they may not have savings that can see them through lean periods. Many drivers reject the premise that earnings are better during rainy times (I know because I have been asking them whenever I have had the opportunity). Some claim that passengers take shorter journeys when it is raining and that people go out less than when it is sunny.

Human behaviour tends to be far more complex than the simple lab experiments described above. Self-proclaimed experts are much too quick to assume that people are acting against their own interests.

This is even more the case in complicated political decisions such as Brexit. What matters to technocrats and technocratically inclined politicians – in the case of the European Union (EU) the ability to make key decisions away from public scrutiny – is not the same as what matters to most people. When fans of the EU describe Brexit supporters as irrational in such circumstances, it is essentially a form of defamation. In reality, those voting Brexit just used different – although perfectly rational – criteria when deciding how to vote in the referendum. Such disagreements on principle should constitute the essence of political debate.

In any case, the claim that a premise of rationality assumes that people must be perfect calculating machines is absurd. No serious political thinker would argue that anyone is immune to error. The key point is that people are capable of understanding and articulating their interests in rational terms.

Political institutions should be organised in such a way that they facilitate rational decision-making. That means encouraging free and frank debate. Such discussion allows people to reflect on their decisions in a serious way. They also help people to consider what impact decisions might have on society as a whole, rather than just seeing them in narrow personal terms.

The weakness of The Undoing Project is that it fails to see behavioural economics in its broader political context. Elite disdain for the rational capacities of the public goes back at least as far as Plato’s Republic. Behavioural economics has gained such popularity in establishment circles because it gives a pseudo-scientific sheen to anti-democratic ideas.

Behavioural economics

22 Jan 2017

You can listen to my introduction on behavioural economics at last week’s Institute of Ideas Economy Forum HERE.

I will be introducing a discussion of behavioural economics at the Institute of Ideas Economy Forum in London this coming Thursday evening. Do come along if you can. The discussion will range far wider than what is normally conceived of as economics. Details can be found HERE.

My latest book review for the Financial Times was published on 2 December.

For anyone who sees environmentalism as a radical outlook, its adoption by business must be bewildering. The examples are legion. From the World Wildlife Fund credit card from Bank of America to Conservation International’s partnership with McDonald’s to promote Happy Meals; and from Greenpeace endorsing companies, including Mars and Procter & Gamble, that support its sustainable palm oil campaign to Nature Conservancy’s partnership with 3M and Dow Chemical.

For some activists this is simply a matter of greenwash — companies pretending to be environmentally friendly. But it is hard to believe that corporate executives do not, to some degree, support the causes they endorse.

Paul Dauvergne, a professor of international relations at the University of British Columbia, sees it instead as an example of what he calls the “environmentalism of the rich”. He is careful to emphasise this does not refer to support for environmental causes by people who happen to be born wealthy. Instead he argues environmentalism has lost its spirit of outrage. It is only if this is recovered then, he claims, it can take on extreme inequality, destructive growth and excessive consumption.

So Dauvergne is careful to stress he is not opposed in principle to corporate social responsibility, eco-consumerism or partnerships between companies and campaign groups. The thrust of his argument is that such initiatives are positive but insufficient to tackle what he sees as a global ecological crisis.

Essentially this amounts to a narrow tactical critique of mainstream environmentalism which he thinks should be infused with a more passionate form of grassroots activism.

Dauvergne’s main failure is his lack of appreciation that the defining premise of green thinking — that human activity is subject to natural limits — has become pervasive in both business and political circles. Contrary to Dauvergne’s contention, there is little opposition to this outlook. Governments worldwide endorse sustainability as do a large number of business leaders. They might not go as far as the activists would like but they are nevertheless thoroughly imbued in green thinking.

This shift, which has taken place over several decades, reflects the emergence of a profound lack of confidence within the business and political elites. Businesses all too often feel uncomfortable with their traditional role of helping to make society more prosperous. So they play down the importance of their core activities while emphasising their eagerness to change the world. Politicians too tend to question their ability to help create a framework to generate more prosperity. The spread of green thinking in such circles is an outward expression of this crisis of faith.

Dauvergne also fails to explain the paradox he points to so often. Global consumption levels keep rising despite all the talk of sustainability. For him it seems to be simply a matter of too many people behaving irrationally or being duped by advertising. He cannot accept the reality that huge numbers of people quite reasonably want more.

The bulk of the world’s population demands higher material living standards. This is most evident among the world’s poorest. According to the World Bank, there were 767m living on less than $1.90 in 2013. But this is an incredibly low threshold. There are billions more people in the developing world living on low incomes and even in the advanced economies many have suffered stagnant incomes for years.

The fashionable heart-rending by world leaders about extreme inequality is not about achieving affluence for all. On the contrary, the implication is that the bulk of humanity should be prepared to make sacrifices for the sake of mitigating the most extreme forms of poverty.

It would be far better if businesses focused more on their traditional role of raising prosperity while politicians supported them. More resources and better technology help create the conditions to raise living standards but also to overcome environmental challenges. Achieving a richer world means transcending apparent environmental limits rather than embracing them.