A very rare thing is happening this week: hundreds of millions of people across the world are undertaking a massive economics experiment. True, hardly any of us think of it as such. Instead, we pledge to lose weight, give up the demon weed or just to get along with our mothers-in-law. But each of these New Year resolutions are exercises in attempting to change what we do – and as such are voyages deep into social science.
Your pledge to lead a healthier and happier life is terrain on which the economists have firmly planted their flag. The US professor and economics blogger Tyler Cowen claims: “Understanding economics can help you make better decisions and lead a happier life.” Wander into any bookshop and the economics section will be full of paperbacks promising to explain how and why single people choose to get married, send children to expensive private schools or deal drugs. Perhaps titles such as Freakonomics and the Undercover Economist can be accused of being pop. But consider the late Gary Becker, who received the Nobel prize for economics in 1992 for extending “the sphere of economic analysis to new areas of human behaviour and relations”. His trademark was to look not at “the economy” but to train his microscope on matters of daily life – racial discrimination, child-rearing, even suicide.
Economists are often accused of treating humans as perfectly rational and far-seeing. That is a little unfair – but only a tad. As Michelle Baddeley, professor of economics at University College London, writes in her new book: “Most economists describe people as mathematical calculators – able easily and accurately to add up the money costs and benefits of their choices in pounds and pence, dollars and cents – and without worrying about what others around them are doing.” That can’t be said of Becker, who kicked off his Nobel lecture with these words: “I have tried to pry economists away from narrow assumptions about self-interest.”
Becker looked for the rationality that underlay phenomena such as racism: this was part of what made him such a controversial figure. But, however imaginative his approach, it is of only limited use in determining why we break our resolutions – or, put another way, why we don’t do what we know we should. Economists do study decision-making and indeed resolutions. Much of what they say is of great help in fighting January’s ground war of noble spirit versus weak flesh: announce your commitments, perhaps attach a financial incentive to observing them. But what economists are less good at is providing a convincing explanation of why the majority of us break our resolutions – why we fail. Those explanations are best provided by psychology and sociology – the award in 2002 of the economics Nobel to psychologist Daniel Kahneman for his (together with Amos Tversky) seminal work on “human judgment and decision-making under uncertainty” is an implicit acceptance of the limits of economics. There’s nothing necessarily wrong with that. Mainstream economics struggles to integrate behavioural insights into its models. The gulf may be too big – and it is best to stop trying to bridge it but instead acknowledge the limits of economics.
In his General Theory, John Maynard Keynes often delves into psychology: the “beauty contest” of investment, the “animal spirits” needed for entrepreneurialism. These and other subjects he left as areas of “uncertainty” rather than attempting what today’s bankers would do and quantify them as risks. This is a more limited economics, but also a more honest form. Almost a decade after a crash that so few of them foresaw, economists would do better to own up to what they don’t know rather than chucking in their tuppen’oth into subjects outside their ken. So when, as seems statistically likely, you break your January resolution, take this crumb of comfort: you and millions of others have proved again the need for a more modest economics.