BREAKING FROM THE HERD
More on Behavioral Economics

What are the implications of these ideas for policy? According to Mr Marglin, they are profound. What if people cannot even calculate the amount they are willing to pay for a pound of butter or a haircut, or have any idea what prices will be in the future? In such a world, such basic constructs as demand and supply curves—which show the quantities that people and firms would be willing to demand or supply at given prices—lose their meaning. The normal economic calculations of costs and benefits—for example, of the costs created by a tax increase or the imposition of a tariff—depend on estimates of these curves. These calculations, and the policy conclusions that follow from them, may therefore be threatened by the behavioural approach.

This helps unorthodox economists in a range of debates with those in the mainstream. Support for school vouchers, for example, relies crucially on the notion that people know what is best for them, or at any rate for their children. Free trade relies on the benefits that occur to many from lower import duties, set against the costs suffered in the form of lost jobs in industries competing with imports. But if these things cannot be measured, or even theorised about sensibly, the rationale seems to melt away. Mr Marglin would have students read about the travails of unemployed textile workers in the American South who have lost their jobs thanks to NAFTA, rather than wade though econometric studies of the net benefits of the trade agreement to the American and Mexican economies.

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Thanks to J. Orlin Grabbe.

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