Mainstream economics and neoliberalism

23 Jan, 2013 at 13:37 | Posted in Economics, Politics & Society | 5 Comments

Unlearning economics has an interesting post on some important shortcomings of mainstream (neoclassical) economics and libertarianism (on which I have written e.g. here, here, and here ):

I’ve touched briefly before on how behavioural economics makes the central libertarian mantra of being ‘free to choose’ completely incoherent. Libertarians tend to have a difficult time grasping this, responding with things like ‘so people aren’t rational; they’re still the best judges of their own decisions’. My point here is not necessarily that people are not the best judges of their own decisions, but that the idea of freedom of choice – as interpreted by libertarians – is nonsensical once you start from a behavioural standpoint.
The problem is that neoclassical economics, by modelling people as rational utility maximisers, lends itself to a certain way of thinking about government intervention. For if you propose intervention on the grounds that they are not rational utility maximisers, you are told that you are treating people as if they are stupid. Of course, this isn’t the case – designing policy as if people are rational utility maximisers is no different ethically to designing it as if they rely on various heuristics and suffer cognitive biases.

This ‘treating people as if they are stupid’ mentality highlights problem with neoclassical choice modelling: behaviour is generally considered either ‘rational’ or ‘irrational’. But this isn’t a particularly helpful way to think about human action – as Daniel Kuehn says, heuristics are not really ‘irrational’; they simply save time, and as this video emphasises, they often produce better results than homo economicus-esque calculation. So the line between rationality and irrationality becomes blurred.

For an example of how this flawed thinking pervades libertarian arguments, consider the case of excessive choice. It is well documented that people can be overwhelmed by too much choice, and will choose to put off the decision or just abandon trying altogether. So is somebody who is so inundated with choice that they don’t know what to do ‘free to choose’? Well, not really – their liberty to make their own decisions is hamstrung.

Another example is the case of Nudge. The central point of this book is that people’s decisions are always pushed in a certain direction, either by advertising and packaging, by what the easiest or default choice is, by the way the choice is framed, or any number of other things. This completely destroys the idea of ‘free to choose’ – if people’s choices are rarely or never made neutrally, then one cannot be said to be ‘deciding for them’ any more than the choice was already ‘decided’ for them. The best conclusion is to push their choices in a ‘good’ direction (e.g. towards healthy food rather than junk). Nudging people isn’t a decision – they are almost always nudged. The question is the direction they are nudged in.

It must also be emphasised that choices do not come out of nowhere – they are generally presented with a flurry of bright colours and offers from profit seeking companies. These things do influence us, as much as we hate to admit it, so to work from the premise that the state is the only one that can exercise power and influence in this area is to miss the point.

The fact is that the way both neoclassical economists and libertarians think about choice is fundamentally flawed – in the case of neoclassicism, it cannot be remedied with ‘utility maximisation plus a couple of constraints’; in the case of libertarianism it cannot be remedied by saying ‘so what if people are irrational? They should be allowed to be irrational.’ Both are superficial remedies for a fundamentally flawed epistemological starting point for human action.


  1. In reality, people invent routines, to reduce choice and make life easier. Everybody that have tried to penetrate ads from telephone companies would understand this; I wonder how libertarians do. Read telephone company ads all day?

    • If you don’t take it upon yourself to process more information than is humanly possible, the immoral actions of global corporations, or them f***ing you over – is your own fault!

  2. Heh, freedom. First of all; freedom = barbarism, civilization = not free. So what they are talking about here is something other than freedom, which would require a definition, but in all these discussions the definition is conveniently left out. In civilization we talk about accountability, freedom is then to be free from accountability. So when you are given a choice by an authority, the authority is not giving you greater freedom, the authority still controls the choices, what the authority is doing is to give you the accountability. You see why freedom of choice is so popular among politicians and other authorities. It frees leaders of the society to provide good healthcare, good retirement homes, good schools and so forth, if the social services are crap, its your own fault.

    We can compare this to how banks used to work back in the day. Back in the day you put your money into an account and you recieved an interest on that money, that was how everyone saved money. The bank would use your money to speculate with, being seriously motivated to make a profit greater than the interest, which every accountholder was entitled to, if the bank would fudge things they still had to pay you interest and they had to carry the loss for their poor decisionmaking. Then the “freedom of choice” era entered the world, suddenly a simple account gave 0% interest, if you wanted more you would have to buy a speculation package called a collective investment scheme, this is just the bank playing around whith money as they did before, but now you have the “freedom” to opt in. For this the bank takes out a fee and if they loose money on it, it is your own fault for using your new found “freedom” poorly, they will take the loss out of your savings. So by selling you the idea of “freedom” the bank managed to sell you their accountability for their speculation, and you pay to take on this extra responsibility and extra risk.

    When ever someone uses the word “freedom”, you can be sure of only one thing, they are scamming you. Just as the banks did, just as the politicians did when they decided they didn’t have to provide good schools for society, they put their accountability on your shoulders and called it freedom. And freedom it was, but not for you, the ordinary citizen.

  3. Rational choice theory assumes perfect knowledge unlimited by time frame. However, for a great deal of choice, there is insufficient data for a probabilistic solution and this doesn’t take transaction cost into account either. Then there is Knightian uncertainty. The fact is that even the smartest and best informed human beings and institutions are still left largely groping in the dark. Then there is the obstacle course of cognitive biases that one must deal with while groping along. Oh, and the con men, too.

    • Gunnar Myrdal´s (1930), (“The Political Element in the Development of Economic Theory, english 1953,Routledge & Kegan Paul,London)
      Myrdal writes:

      “Action is said to be a direct consequence of the hedonistic calculus only if it is rational.The whole psychological theory applies only to the economic man who is defined as a man who assesses pleasure and pain effects (note that their existence is thereby implied) at their true value and who always chooses that line of action which maximizes his net pleasure.Now this is the fundamental flaw of the hedonistic theory.(…) The theory is claimed to be correct in the sense that anybody who acts in accordance with it, acts as the theory claims he does. This is of course circular reasoning.” p. 92).

      “Marginal utility theory attempted to give a hedonistic interpretation of value at a time when psychologists were
      abandoning hedonism in favour of a more realistic analysis.(…(This) indicates clearly the lack of contact between economics and psychology.(p. 81)
      and further:

      “For a criticism of subjective value theory it is not sufficient to say that hedonistic quantities are not measurable. They are measurable if we grant the psychological premises,since these premises already imply measurability.It can hardly be denied that the subjective theory of value is true if hedonistic psychology is true.” (1930, p. 92)
      And more:

      “We cannot dismiss the subjective theory of value simply by saying that it cannot be reduced to quantitative terms.It can
      if the hedonistic explanation of human behaviour is correct.(…) The question is whether the claim of marginal utility
      theory to be an accurate explanation of human behaviour is justified.” (1930, p. 97).
      This was an early critique,Gunnar Myrdal was even more harsh in later works.

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